Dish Buys Blockbuster

Dish Network Corp. has won a bankruptcy auction for Blockbuster, offering about $320.6 million for the movie-rental chain. Dish, unlike some of the other bidders, has said it would keep some of the stores open as retail locations to support sales of Dish services.

Some may question the wisdom of that move, but Apple also was highly criticized for opening its own retail stores. There now is recognition that the retail outlets now play a huge role in Apple's sales and support process, though. Likewise, mobile service providers have found retail locations to be crucial for selling mobile services.

Dish Network Corp. has won a bankruptcy auction for Blockbuster, offering about $320.6 million for the movie-rental chain. Dish, unlike some of the other bidders, has said it would keep some of the stores open as retail locations to support sales of Dish services.

Some may question the wisdom of that move, but Apple also was highly criticized for opening its own retail stores. There now is recognition that the retail outlets now play a huge role in Apple's sales and support process, though. Likewise, mobile service providers have found retail locations to be crucial for selling mobile services.

But Blockbuster also brings other assets that do mesh with the current Dish strategy, including the Blockbuster online and kiosk vending services. Dish also has been making other moves in the mobile and on-demand video business, though some analysts might claim they do not yet fully understand what the grand strategy is. Neither would Dish CEO Charlie Ergen, either, at this point. Rather, Ergen seems to understand that the TV business is changing, and that mobile and online services are part of that future.

The Blockbuster acquisition therefore would seem to complement a growing interest by Dish in alternative distribution channels and business models.

Dish also earlier acquired DBSD North America, Inc., a hybrid satellite and terrestrial communications company, for approximately $1 billion. DBSD has a license to operate in 8 MHz worth of spectrum.

Frontier Wireless, the wholly owned subsidiary of Dish, also owns 168 licenses in the 700 MHz range, covering about 76 percent of the U.S. population. The licenses represent 5 MHz worth of spectrum. There has been speculation about what Dish might plan to do with such spectrum, but the purchases of other assets supporting terrestrial mobile service with satellite backhaul suggest a possible move into a video service usable by mobile devices.

It is possible to use the same approach to deliver signals to fixed locations such as homes, but bandwidth constraints would make an on-demand service difficult. A more logical approach would be linear video or multicast services based on use of mobile devices.

Sister company Echostar, for its part, owns Slingbox and now Hughes Network Systems, which gives Echostar a new international business revenue stream, enterprise networks and an owned satellite network offering significant new wide-area distribution capability. Whether those assets might play a role in Dish strategy is not immediately clear.

What does seem logical is that a couple of the Dish assets could be used to create a mobile-focused video service. A technology known as TDtv supports mobile multicast content, delivering as many as 14 high-quality, 300 kbps video streams channels using only 5 MHz of unpaired spectrum. It contains a built-in uplink capability that will allow for some digital video recorder features as well.

For its part, Clearwire also has been talking to satellite concerns about creating some sort of mobile TV service as well, though nothing concrete seems to have emerged from those talks.

CEO Charlie Ergen has not been shy about suggesting that if an entrepreneur wanted to get into the TV distribution business today, that person might well take a "Netflix" style, over the top approach, rather than launch satellites or even build cable networks. Another analogy Ergen has used in the past is fixed and mobile voice service. Essentially, he has likened satellite-delivered TV to fixed-line voice, while online video is more like mobile voice. In other words, the original business was TV by satellite, but the future business will be online.

There might not yet be a clear grand strategy for how Dish uses all the new assets, but it is clear enough that Ergen wants to fashion a business model that is built more on mobile and online video, and less on satellite video delivered to fixed locations.


But Blockbuster also brings other assets that do mesh with the current Dish strategy, including the Blockbuster online and kiosk vending services. Dish also has been making other moves in the mobile and on-demand video business, though some analysts might claim they do not yet fully understand what the grand strategy is. Neither would Dish CEO Charlie Ergen, either, at this point. Rather, Ergen seems to understand that the TV business is changing, and that mobile and online services are part of that future.

The Blockbuster acquisition therefore would seem to complement a growing interest by Dish in alternative distribution channels and business models.

Dish also earlier acquired DBSD North America, Inc., a hybrid satellite and terrestrial communications company, for approximately $1 billion. DBSD has a license to operate in 8 MHz worth of spectrum.

Frontier Wireless, the wholly owned subsidiary of Dish, also owns 168 licenses in the 700 MHz range, covering about 76 percent of the U.S. population. The licenses represent 5 MHz worth of spectrum. There has been speculation about what Dish might plan to do with such spectrum, but the purchases of other assets supporting terrestrial mobile service with satellite backhaul suggest a possible move into a video service usable by mobile devices.

It is possible to use the same approach to deliver signals to fixed locations such as homes, but bandwidth constraints would make an on-demand service difficult. A more logical approach would be linear video or multicast services based on use of mobile devices.

Sister company Echostar, for its part, owns Slingbox and now Hughes Network Systems, which gives Echostar a new international business revenue stream, enterprise networks and an owned satellite network offering significant new wide-area distribution capability. Whether those assets might play a role in Dish strategy is not immediately clear.

What does seem logical is that a couple of the Dish assets could be used to create a mobile-focused video service. A technology known as TDtv supports mobile multicast content, delivering as many as 14 high-quality, 300 kbps video streams channels using only 5 MHz of unpaired spectrum. It contains a built-in uplink capability that will allow for some digital video recorder features as well.

For its part, Clearwire also has been talking to satellite concerns about creating some sort of mobile TV service as well, though nothing concrete seems to have emerged from those talks.

CEO Charlie Ergen has not been shy about suggesting that if an entrepreneur wanted to get into the TV distribution business today, that person might well take a "Netflix" style, over the top approach, rather than launch satellites or even build cable networks. Another analogy Ergen has used in the past is fixed and mobile voice service. Essentially, he has likened satellite-delivered TV to fixed-line voice, while online video is more like mobile voice. In other words, the original business was TV by satellite, but the future business will be online.

There might not yet be a clear grand strategy for how Dish uses all the new assets, but it is clear enough that Ergen wants to fashion a business model that is built more on mobile and online video, and less on satellite video delivered to fixed locations.

For Fixed Network Operators, Competition Really Has Changed Everything

In the telecom business, competition changes everything, a realization that has grown over the decades as increasing portions of the market are exposed to robust competition.

You might think competition matters primarily because market leaders face rival providers who often use the “same product, less cost” marketing platform. That is an issue, but not the biggest issue.

Instead, what really matters is a change in fundamental cost structure for any facilities-based service provider--especially fixed network operators.

In a monopoly environment, the provider of a highly-popular service (voice or video entertainment) might reasonably expect that 85 percent to 95 percent of locations actually will be customers.

In other words, most locations generate revenue. In a duopoly market, assuming two competent providers, each contestant can reasonably expect to split the available market. That might mean a theoretical limit of about 43 percent to 47 percent of locations will generate revenue, for each contestant.

Add a third competent provider and the numbers shrink further. In that scenario, maximum customer locations might be 28 percent to 31 percent.

In other words, a fixed network could well find that fewer than one in three locations passed by its network will generate revenue. That obviously affects and shapes the business model. The reason there is so much emphasis on triple play services is that the strategy helps contestants compensate for the tougher business model of a two-provider or three-provider market.

Internet Protocol makes matters worse for facilities-based providers, since the separation of apps from access means any potential customer can, in principle, buy any key service from any lawful third party service, once a suitable Internet access connection is in place.

At least in principle, widespread availability of over-the-top services further stresses the business model for any facilities-based access provider.

If you want to know why incentives for investment are so important, that is the reason. Even if it is the responsibility of each discrete operator to manage and “right size” costs, it has gotten progressively harder to earn a sustainable return from an effectively-dwindling number of potential customers.

Consider AT&T, which now reports revenue in four buckets: business solutions, consumer mobility, entertainment and Internet services and international.

Business solutions represents 54 percent of total revenue. Consumer mobility represents 27 percent. Entertainment and Internet Services generates about 18 percent of revenue, while International produces only about one percent of revenue.

In other words, 81 percent of revenue is generated by business solutions and consumer mobility. That also is the case for some other fixed network providers that formerly earned most of their revenue from the consumer segment, but now rely on business customers for half or more of revenue.  

The operating income story is more skewed. Business solutions represents 66 percent of total operating income. Consumer mobility represents 38 percent of operating income. Entertainment and Internet Services has negative operating income, as does the International segment.

In terms of operating income, it all comes from business solutions and consumer mobility.

One suspects that will change when AT&T starts reporting results that reflect DirecTV operations, with the entertainment and Internet operations segment assuming both a higher role in revenue, but also contributing operating income.

But that noted, consider the implications. AT&T generates 81 percent of revenue from business customers and its mobility network. By definition, comparatively little revenue is earned from consumers using the fixed network.

The other problem for AT&T is that cable TV companies are the leading providers of high speed access in the U.S. market, especially at 25 Mbps and higher speeds.In fact, by some estimates, fiber to the home is feasible in less than half of all locations globally.  

Fully 54 percent of total AT&T revenue is generated by business customers, on the mobile and fixed network. Stranded assets are not really a problem for the mobile network. But low-earning or stranded assets are a big and growing issue for the fixed network.

Stranded Assets are a Growing Problem

Stranded assets are a growing problem in the facilities-based fixed network business (cable TV or telco).

There are several issues. A growing percentage of potential customers choose not to buy any services at all.

A bigger percentage of homes passed by the networks do buy services, but from another network.

AT&T has said  that it will add 11.7 million additional fiber to the home locations within four years of the closing of its acquisition of DirecTV. That’s a lot of locations.

Keep in mind, however, that AT&T’s network in 2012 passed as many as 76 million consumer and small business locations.

AT&T might have about 30 million homes in its fixed network coverage area.

In 2015, AT&T sold service to about nine million consumer customers, nine million business locations and also two million wholesale lines, representing about 20 million locations. If AT&T sold services to nine million consumer locations, it is deriving revenue from about 30 percent of locations passed by its network.

In other words, 70 percent of consumer locations passed the AT&T fixed network now are stranded assets

Verizon serves about 27 million locations. FiOS passes nearly 19 million of those locations. It is likely Verizon has about the same level of stranded consumer assets as AT&T experiences.

Big Change in U.S. FTTH Business Case

The passage of an  infrastructure bill by the U.S. Congress means as much as $65 billion in support for broadband access across the United States. While the specific allocations are not yet available, that essentially means the business case for deploying fiber to the home--and other access platforms--is better by about that amount. 

The big implication is that the business case for deploying high-performance broadband networks will improve by a substantial margin, bringing millions of locations to the point where such networks are justified in terms of business case, where they had not been deemed feasible in the past. 

The obvious issue is where to prioritize the spending of money and for how many different types of platforms. As always, there will likely be an effort to award subsidy funds in a “platform neutral” manner, or largely so. 

George Ford, economist at the Phoenix Center for Advanced Legal and Economic Public Policy Studies, argues that about 9.1 million U.S. locations are “unserved” by any fixed network provider. 

Though specifics remain unclear, it is possible that a wide range of locations might see their deployment costs sliced by $2,000 or more. Lower subsidies would enable many more locations to be upgraded to FTTH, for example: not the unserved locations but possibly also many millions of locations that have been deemed “not feasible” for FTTH.

Much hinges on the actual rules that are adopted for disbursement. Simple political logic might dictate that aid for as many locations as possible is desirable, though many will argue for targeting the assistance to “unserved” locations. 

But there also will be logic for increasing FTTH services as widely as possible, which will entail smaller amounts of subsidy but across many millions of connections. The issue is whether to enable 50 million more FTTH locations or nine million to 15 million of the most-rural locations. 

Astute politicians will instinctively prefer subsidies that add 65 million locations (support for the most-rural locations plus many other locations in cities and towns where FTTH has not proven obviously suitable). 

The issue is the level of subsidy in various areas. 

“According to my calculations, if the average subsidy is $2,000 (which is the average of the RDOF auction), then the additional subsidy required to reach unserved households is $18.2 billio,” Ford argues. “If the average subsidy level is $3,000, then $22.8 billion is needed. And at a very high average subsidy of $5,000, getting broadband to every location requires approximately $45.5 billion.”

source: Cartesian

Such an extensive subsidy system would change the FTTH business model for all telcos operating in rural and even many urban or suburban areas. might affect cable operators and also could affect demand for all satellite and fixed-wireless operators. 

It just depends on the eligibility rules.

Fiber Reaches Less Than Half of U.S. Commercial Locations

U.S. business locations with 20 or more employees reached by an optical fiber connection  reached 49.6 percent in 2016, according to Vertical Systems Group. In 2004, optical connections reached only about 10 percent of such locations.

One reason so many business locations, even those with at least 20 workers, are not connected directly by optical fiber is that so many are small locations that do not provide a business case. Roughly half of all commercial buildings represent about 10 percent of total floor space, showing how small most sites are.

The vast majority of commercial buildings are relatively small. About half of buildings are 5,000 square feet in size or smaller, and nearly three-fourths are 10,000 square feet or smaller. The median building size is 5,000 square feet (i.e., half the buildings are larger than this and half are smaller), while the average size is 15,700 square feet.

Buildings over 100,000 square feet (from large high schools to hospitals to sprawling distribution centers to skyscrapers, for example) make up only about two percent of the building count but about 35 percent of the total floorspace.

Many of those smaller locations are markets for consumer-grade connections or non-fiber moderate-speed access connections, and may never be amenable to optical fiber access.

 

source: U.S. Energy Information Administration

Offices represent the single biggest category of locations, followed by warehouse and storage locations; service businesses and retail.

source: U.S. Energy Information Administration

Historic Shift of U.S. Internet Access Market Share is Coming

Though U.S. cable operators have steadily added to their installed base of internet access customers for two straight decades, at the expense of telcos, that might be on the cusp of significant change. 

Verizon, for example, seems to be taking share from Altice, despite that firm’s conversion from hybrid fiber coax to a fiber to home platform continues, and even as most of the footprint is offering gigabit levels of service. 

In some markets, independent FTTH providers also are gaining share. Tucows, which operates Ting Internet, has been getting market share.of about 31 percent where it chooses to build its symmetrical fiber-to-home networks. 

Coming next is an expansion of the addressable telco FTTH market, based on $65 billion in subsidies to be enabled by a new infrastructure bill passed by the U.S. Congress. 

The passage of an  infrastructure bill by the U.S. Congress means as much as $65 billion in support for broadband access across the United States. While the specific allocations are not yet available, that essentially means the business case for deploying fiber to the home--and other access platforms--is better by about that amount. 

The big implication is that the business case for deploying high-performance broadband networks will improve by a substantial margin, bringing millions of locations to the point where such networks are justified in terms of business case, where they had not been deemed feasible in the past. 

The obvious issue is where to prioritize the spending of money and for how many different types of platforms. As always, there will likely be an effort to award subsidy funds in a “platform neutral” manner, or largely so. 

George Ford, economist at the Phoenix Center for Advanced Legal and Economic Public Policy Studies, argues that about 9.1 million U.S. locations are “unserved” by any fixed network provider. 

Though specifics remain unclear, it is possible that a wide range of locations might see their deployment costs sliced by $2,000 or more. Lower subsidies would enable many more locations to be upgraded to FTTH, for example: not the unserved locations but possibly also many millions of locations that have been deemed “not feasible” for FTTH.

Much hinges on the actual rules that are adopted for disbursement. Simple political logic might dictate that aid for as many locations as possible is desirable, though many will argue for targeting the assistance to “unserved” locations. 

But there also will be logic for increasing FTTH services as widely as possible, which will entail smaller amounts of subsidy but across many millions of connections. The issue is whether to enable 50 million more FTTH locations or nine million to 15 million of the most-rural locations. 

Astute politicians will instinctively prefer subsidies that add 65 million locations (support for the most-rural locations plus many other locations in cities and towns where FTTH has not proven obviously suitable). 

The issue is the level of subsidy in various areas. 

“According to my calculations, if the average subsidy is $2,000 (which is the average of the RDOF auction), then the additional subsidy required to reach unserved households is $18.2 billio,” Ford argues. “If the average subsidy level is $3,000, then $22.8 billion is needed. And at a very high average subsidy of $5,000, getting broadband to every location requires approximately $45.5 billion.”

Such an extensive subsidy system would change the FTTH business model for all telcos operating in rural and even many urban or suburban areas. might affect cable operators and also could affect demand for all satellite and fixed-wireless operators. 

It just depends on the eligibility rules. 

Generally speaking, both AT&T and Verizon, where they offer fiber-to-home service, have been getting installed base a bit higher than 40 percent, in markets where they have been marketing for at least a few years. AT&T is hopeful it can, over time, boost share to about 50 percent of the market. 

Unless cable operators fail to respond, and that is highly unlikely, their installed base could  drop from about 70 percent to perhaps 50 percent if telcos adopt FTTH on a wide scale. That obviously leaves little room for third providers at scale, on a sustainable basis. 

To be sure, Ting Internet is “cherry picking” its markets, picking locations where it believes it has the best chance to gain share. 

Those typically are higher-income suburban areas where the main competitor, in terms of speed, is the cable operator, and where a telco remains wedded to copper access. Market share should be lower in areas where both the incumbent cable operator and telco offer gigabit speeds. 

In those markets, assuming pricing is relatively comparable, Ting’s advantage in part will rely on upstream bandwidth capabilities, at least where compared to the cable operator. 

It is harder to predict what might be the case in a decade, when telcos and cable operators alike might be offering access routinely in the gigabit to multi-gigabit ranges, possibly with upstream bandwidth high enough that return bandwidth is not an issue for nearly all customers, even if not fully symmetrical. 

To be sure, terms and conditions and general customer expectations about experience will matter. Internet service providers as a class do not score highly in the American Customer Satisfaction Index, for example. Whether specialist providers can do better, on a sustainable basis, is the issue.  

Brand name preferences and product bundling might also help the largest incumbents. According to ACSI, for example, in 2021 AT&T and Verizon both are ranked higher in customer satisfaction scores than any of the cable companies. 

That is surprising, especially for AT&T, which has not yet converted most of its plant to FTTH. The infrastructure bill is likely to accelerate AT&T deployments of FTTH, if it significantly changes the business case.

23% of U.S. Business Sites Now are Fiber-Served

What percentage of U.S. business locations would you suggest now have optical fiber connections available to them? According to Vertical Systems Group, just 23 percent of U.S. sites and 15 percent of sites in Europe have optical access.


While most large enterprise locations in the United States and Europe are fiber-connected, small and medium business sites generally are underserved with fiber from any service provider.


"The good news is that overall accessibility to business fiber has more than doubled within the past five years," says Rosemary Cochran, Vertical Systems Group principal.


The challenge ahead is to extend fiber connectivity to remote business locations. Of course, not all smaller business locations need the fiber that typically supports gigabit-per-second bandwidth. Given that 1.544 Mbps connections are the mainstay for most smaller and even many mid-sized businesses, many customers might be quite satisfied with speeds in the tens of megabits per second.

Between FTTH and DSL Lies Fixed Wireless

We might all agree that telcos would prefer to build their next-generation networks on fiber to the home. We might also agree that the business case remains difficult in perhaps half of all locations. 

For that reason, 5G fixed wireless has gained traction in some quarters, and might be increasingly attractive to others if fixed wireless traction is gotten. 

AT&T now has about 15 million homes reachable with its fiber to home facilities, with plans to expand to about 30 million locations by about 2025. All together, AT&T’s fixed network passes about 60 million locations, however. 

So the business model--as presently constituted--does not seem attractive for FTTH in about half the total fixed network passings, at the moment. Whether AT&T believes fixed wireless will be important in that regard is less than certain. Up to this point, AT&T has not been as bullish on fixed wireless as Verizon or T-Mobile. 

But AT&T does have national 5G assets that could underpin a wider move to fixed wireless, even if executives do not prefer that strategy at the moment. 

Other major operators without 5G assets would have to rely on partner agreements before such a strategy would make sense. 

Lumen Technologies has about 15 million homes in its access network footprint,  2.5 million of which are passed by the fiber-to-home network. So less than 17 percent of locations presently are deemed feasible for FTTH. 

With 21 million locations served by the access network, that implies about six million business locations. Perhaps more important, Lumen now has about 97 percent of all U.S. enterprises within a five-millisecond latency range. 

After partnering with T-Mobile for 5G access, Lumen argues it can span “the last 100 feet” of the access network in that manner. 

One area where AT&T should be able to improve is FTTH take rates, which have been at about 35 percent of marketable locations, and might now be up to 37 percent, at the end of the third quarter 2021. 

On the other hand, it appears that take rates for new FTTH accounts might in most cases--80 percent according to AT&T CEO John Stankey--be market share taken from another provider. If that continues, it is reasonable to suggest that AT&T could eventually reach 50 percent share of the installed base, up from the 30 percent or so share it has gotten over the last decade or two. 

At the moment, AT&T’s rule of thumb is that unless 40 percent share is possible, new FTTH does not make sense.

Verizon and T-Mobile, on the other hand, are much more bullish on fixed wireless, for reasons related to their present revenue models. T-Mobile has had zero share of the home broadband market, so fixed wireless offers an opportunity for top-line revenue growth that by shifting just a few percent of market share could generate billions in new revenue. 

Verizon now says it will pass 15 million homes with its fixed wireless services, using both 4G and 5G, while total fixed wireless accounts at the end of the third quarter 2021 were 150,000, of which 55,000 were added in the third quarter alone. 

In the past Verizon has talked about a fixed wireless footprint of about 50 million homes as a planned-for goal as the C-band assets are turned up, possibly by the end of 2021. 

Most of that coverage will occur in areas outside the Verizon fixed network territory. At the moment, about half the Verizon fixed wireless customers represent new accounts, while half are existing Verizon customers. 

“I would say, there are probably, roughly, half and half,” said Hans Vestberg, Verizon CEO. “Half meaning coming from our existing base and half we're taking from other suppliers.”

Significantly, Verizon also reports that fixed wireless average revenue per user is “similar” to a mobility account. That suggests that most of the installed base is on 4G or lower-speed 5G at the moment, and also suggestive of pricing suggesting that most customers also use Verizon for mobility service ($40 a month for Verizon mobility customers, $60 for non-customers). 

Some of us would expect ARPU to begin climbing as more of the customer base adds services using millimeter wave and mid-band spectrum. The pricing for those plans runs from $50 a month (Verizon mobility customers) up to $70 a month (non-mobile subscribers). 

As will be the case for 5G generally, Verizon fixed wireless might come in three flavors. Some customers might only be able to buy 4G versions, which are the most speed-constrained, and generally topping out somewhere between 25 Mbps and 50 Mbps. 

Most customers will be able to buy mid-band 5G fixed wireless, which likely will be able to support the 100 Mbps to 200 Mbps services most households buy at the moment. Some lesser percentage of locations will be able to buy the wireline-equivalent millimeter wave services operating up to a gigabit per second or so. 

Over the last year, though the fiber-to-home footprint grew by 500,000 locations, the fixed wireless footprint added 11.6 million locations. 

In fact, fixed wireless now accounts for about 41 percent of Verizon’s home broadband passings. 

source: Verizon 

It remains to be seen how many customer accounts will be driven by fixed wireless, to be sure. In the past, many observers have suggested fixed wireless suppliers can get take rates in the 15 percent to 20 percent range.

In a saturated market, those gains largely represent market share taken from another supplier. So the market share implications are quite significant, representing a change between 30 percent to 40 percent in overall share. 

The expansion of millimeter radio and C-band radio assets will be important. Roughly half the U.S. home broadband base has been content to buy service in the 100 Mbps to 200 Mbps range. 

C-band will help boost fixed wireless into those ranges, while millimeter wave will enable speeds approaching the top tier of consumer demand (gigabit service).  

Such lower-speed home broadband might appeal to customers content to purchase service operating at the lower ranges of bandwidths at or below 50 Mbps. That still represents 10.5 percent of the market, according to Openvault. 

Notably, the third quarter 2021 earnings report was the first ever when Verizon actually began reporting fixed wireless subscriber growth. That is normally an indication that a firm believes it has an attractive story to tell, with volume growth expected. 

Fiber Capex Contrasts at Lumen

The fourth quarter 2022 Lumen Technologies earnings call was in some ways a study in infrastructure contrasts and an indication that further restructuring could happen. 

Lumen is adding about six million intercity fiber miles of capacity by 2026. That supports the part of Lumen’s business built largely around the intercity capacity business in the United States, and global capacity in the northern hemisphere. 

Contrast that with what happened to the fiber-to-home program. “As we've said previously, we hit the pause button during the fourth quarter,” said Kate Johnson, Lumen CEO.  “Now, to be frank, it was more of a stop button than a pause.”

“A natural outcome of our assessment of Quantum is a more focused build target,” said Johnson. “We believe the overall Quantum enablement opportunity is eight million to 10 million locations.”

For Lumen, that suggests up to half the homes in its service territory are the best chances to monetize fiber-to-home investments. Lumen has an estimated 21 million to 24 residential and small business locations passed by its networks in 16 states. 

The latest statements suggest Lumen believes between 38 percent and 43 percent of mass market locations are suitable for FTTH investment over the next half decade or so. 

The issue for Lumen, as was the case for the former US West--which has had the least-dense footprint of all the former Baby Bells--is what to do about the rest of the customer base, assuming copper access is not a long term solution.

Divesting rural assets already has been the answer, as Lumen sold off access assets in 20 states. That raises the theoretical possibility that Lumen sells still more of its rural assets over time, as about 60 percent of its local access locations are deemed insufficiently profitable to serve with FTTH facilities at the moment. 

Keep in mind that 79 percent of Lumen’s revenue is earned serving large and mid-sized business customers. Most of that revenue comes from the intercity network and local connections and services to customers in the larger urban markets. 

Much small business revenue is counted in mass markets, where, increasingly, revenue is anchored in fiber-based internet access (home broadband) of about $60 a month. 

source: Lumen Technologies 

FTTH investments rarely offer a “no brainer” business case. In Lumen’s case, the issue will be what to do about the 60 percent of mass market locations that do not seem amenable.

AT&T Critics are Simply Wrong About Linear Video

Inevitably, aside from claims that the “wheels are coming off” the linear video business, there will be renewed criticism that AT&T should instead have spent the capital used to acquire DirecTV, and then (if approved by regulators) Time Warner, to upgrade its consumer access networks.

The critics are wrong; simply wrong, even if it sounds reasonable that AT&T could have launched a massive upgrade of its fixed networks, instead of buying DirecTV or Time Warner (assuming the acquisition is approved).

AT&T already has said it had linear video subscriber losses of about 90,000 net accounts in the third quarter. In its second quarter, net losses from U-verse and DirecTV amounted to about 351,000 accounts.

Keep in mind that, as the largest U.S. linear video provider, AT&T will lose the most customers, all other things being equal, when the market shrinks.

Some have speculated that AT&T potential losses could be as high as 390,000 linear accounts.

Such criticisms about AT&T video strategy might seem reasonable enough upon first glance.

Sure, if AT&T is losing internet access customers to cable operators because it only can offer slower digital subscriber line service, then investing more in internet access speeds will help AT&T stem some of those losses.

What such criticisms miss is that that advice essentially is an admonition to move further in the direction of becoming a “dumb pipe” access provider, and increasingly, a “one-service” provider in the fixed business.

That key implication might not be immediately obvious.

But with voice revenues also dropping, and without a role in linear or streaming subscription businesses, AT&T would increasingly be reliant on access revenues for its revenue.

Here is the fundamental problem: in the competitive era, it has become impossible for a scale provider (cable or telco) to build a sustainable business case on a single anchor service: not video entertainment, not voice, not internet access.

In fact, it no longer is possible to sustain profits without both consumer and business customers, something the cable industry is finding.

So the argument that AT&T “should have” invested in upgraded access networks--instead of moving up the stack with Time Warner and amassing more accounts in linear video with the DirecTV buy--is functionally a call to become a single-service dumb pipe provider.

That will not work, and the problem is simple math. In the fiercely-competitive U.S. fixed services market, any competent scale player is going to build a full network and strand between 40 percent and 60 percent of the assets. In other words, no revenue will be earned on up to 60 percent of the deployed access assets.

No single service (voice, video, internet access) is big enough to support a cabled fixed network. Period.

That is why all scale providers sell at least three consumer services. The strategy is to sell more units to fewer customers. Selling three services per account is one way to compensate for all the stranded assets.

Assume revenue per unit is $33. If one provider had 100-percent adoption, 100 homes produce $3,000 in gross revenue per month. At 50 percent penetration (half of all homes passed are customers), just $1650 in gross revenue is generated.

At 40-percent take rates, gross revenue from 100 passed locations is $1320.

But consider a scenario where--on average--each account buys 2.5 services. Then, at 50-percent take rates, monthly gross revenue is $4125 per month. At 40-percent adoption, monthly revenue is $3300. You get the point: selling more products (units) to a smaller number of customers still can produce more revenue than selling one product to all locations passed.

The point is that it is not clear at all that AT&T could have spent capital to shore up its business model any more directly than by buying DirecTV and its accounts and cash flow.

That the linear model is past its peak is undeniable. But linear assets are the foundation of the streaming business, and still throw off important cash flow that buys time to make a bigger pivot.

One might argue AT&T could have purchased other assets, though it is not clear any other assets would have boosted the bottom and top lines as much as did DirecTV.

What is relatively clear is that spending money to become a dumb pipe internet access provider will not work for AT&T, even if all the DirecTV capital had been invested in gigabit networks. At best, AT&T might have eventually slowed the erosion of its dumb pipe internet access business. It would not have grown its business (revenue, profits, cash flow) enough to justify the diversion of capital.

Would AT&T be better off today, had it not bought DirecTV, and invested that capital in gigabit internet access? It is hard to see how that math would play. Just a bit after two years since the deal, AT&T would not even have finished upgrading most of the older DSL lines, much less have added enough new internet access accounts to justify the investment.

AT&T passes perhaps 62 million housing units. In 2015, it was able to deliver video to perhaps 33 million of those locations. Upgrading just those 33 million locations would take many years. A general rule of thumb is that a complete rebuild of a metro network takes at least three years, assuming capital is available to do so.

Even if AT&T was to attempt a rebuild of those 33 million locations, and assuming it could build three million units every year, it would still take a decade to finish the nationwide upgrade.

In other words, a massive gigabit upgrade, nationwide, would not have generated enough revenue or cash flow to justify the effort, one might well argue.

Assume AT&T has 40 percent share of internet access accounts in its former DSL markets. Assume that by activating that network, it can half the erosion of its internet access accounts. AT&T in recent quarters has lost perhaps 9,000 accounts per quarter. Assuming AT&T saves 10 percent of those accounts, that amounts to only about 900 accounts, nationwide.

That is not enough revenue to justify the effort, whatever the results might be after a decade, when all 33 million locations might be upgraded.

source: Bruce Kushnick

The simple point is that AT&T really did not have a choice to launch a massive broadband upgrade program, instead of buying DirecTV, and instead of buying Time Warner. The financial returns simply would not have been there.