AT&T, Comcast and Verizon Collectively Generate about $212 Per Home Passed, Annually

It is not easy to run a big fixed network business these days. As Verizon CEO Hans Vestberg said on Verizon’s fourth quarter earnings call, Verizon faces a “secular decline in wireline business that is continuing.” 

Secular means a trend that is not seasonal, not cyclical, not short term in nature. For multi-product companies such as AT&T, Verizon and Comcast, it can be argued that "everything other than the core business is doing a lot worse than the core business, both at Comcast and at AT&T and at Verizon.

One supposes the “core business” for AT&T and Verizon is mobility, while the core business for Comcast is fixed network broadband. The conclusion analyst Craig Moffett of MoffettNathanson reaches is that AT&T, for example, will have to be broken up. 

The suggestion to focus on the “core business” often produces financial returns when conglomerates are broken up. 

What might not be so clear is how breaking up triple play assets, or separating mobile from fixed assets necessarily helps the surviving connectivity assets to generate greater revenue and profits. 

Is it logical to assume that the AT&T and Verizon businesses would all do better if the fixed network assets, mobile assets and media assets were separated? Would Comcast’s financial returns be better if the content assets were separated from the fixed network, or the video entertainment business separated from the network connectivity business?

Given the “secular decline” of the fixed network business, could a fixed services only approach (internet access, voice and perhaps video entertainment) actually work, at the scale the separated Comcast, AT&T or Verizon assets would represent?

The issue is not whether a small firm, with a light cost structure, might be able to sustain itself in some markets selling internet access alone, or internet plus voice. The issue is whether an independent AT&T fixed network or an independent Verizon fixed network business could sustain itself. 

The answers arguably are tougher than they were twenty years ago, when a telco and a cable company faced each other with a suite of services including internet access, voice and entertainment video. Basically, they traded market, at best. Telcos ceded voice share, but cable lost some video share, and both competed for internet access accounts. 

At a high level, the strategy was that both firms would trade share, but by selling three services on one network, instead of one service on each network, the numbers would still be workable.

But the math gets harder when every one of those three services faces sustained declining demand and falling prices. 

That being the case, it is hard to see how a sustainable business can be built on connectivity services alone, especially for either AT&T or Verizon. Perhaps Comcast could survive with a strong position in internet access and smaller contributions from voice and possibly video entertainment. 

In the fourth quarter of 2019, Comcast Cable generated $14.8 billion in revenue.  Total revenue that quarter was $28.4 billion. 

Verizon’s fixed network business, on the other hand, generated about $7 billion, out of total revenue of nearly $35 billion. 

AT&T had fourth quarter 2019 total revenue of nearly $47 billion. AT&T’s fixed network, plus satellite TV, generated about $18 billion in revenue.  AT&T’s “fixed network plus satellite” operations generate 38 percent of revenue. Perhaps $8 billion or so of that revenue comes from the satellite operations. So the fixed network business might generate $10 billion in revenue. 

Comcast Cable passes 58 million consumer and business locations. Comcast has 26.4 million residential high-speed internet customers, 20.3 million residential video customers and 9.9 million voice accounts, generating average cash flow (EBITDA) of $63 per unit. 

At a high level, the problem is that Verizon’s entire fixed network operation generates about 20 percent of total revenue. AT&T’s fixed network generates perhaps 21 percent of revenue. Comcast, which has a small mobile operation, generates close to $15 billion from the fixed network. 

And that, it seems to me, illustrates the problem. Comcast, AT&T and Verizon all put together generate about $32 billion in fixed network revenue, and revenue is likely to remain flat to negative. 

Verizon homes passed might number 27 million. Comcast has (can actually sell service to ) about 57 million homes passed.

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. 

CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to. 

Looking only at Comcast, AT&T and Verizon, $32 billion in annual fixed network revenue is generated by networks passing about 146 million U.S. homes. That works out to about $212 per home passed, per year. 

How that is sustainable is a clear challenge.

Indoor Services Could Drive Many New Revenue Niches

We do not typically think of the internet and mobile business as a matter of “indoor” and “outdoor” business models. Rather, we tend to look at the ecosystem as an “edge provider” and “service provider” dichotomy, or sometimes in a broader context, including chips, infrastructure, devices, apps, connectivity and sometimes other categories such as retail distribution.

The point is that the whole internet ecosystem contains many segments, and opportunities for any stakeholder to grow by occupying adjacent niches. The other issue is that the share of ecosystem revenue might well change, over time. In many cases, growth is not so much the issue as rates of growth.

Still, businesses and revenue built on “indoor” parts of the ecosystem are substantial, and have offered most of the opportunities for businesses that are not tier-one service providers.

That always has been the case, if you think about it. Phone interconnects, value-added resellers, system integrators, venue Wi-Fi, cable TV and the device business all rely principally on solving indoor problems, not “access.”

Many believe such opportunities could grow as new platforms, such as Citizens Broadband Radio Service (CBRS) emerge. CBRS and private LTE could underpin a new wave of business models that drive revenue by solving indoor connectivity problems and create new value propositions.

The existing models include Wi-Fi, local areas networks, the distributed antenna system business, Wi-Fi offload and small cell deployments (which can take carrier, venue or end user forms).  

Boingo says it has 54 distributed antenna system (DAS) venues live, with another 73 venues in backlog. Boingo, which already is heavily in the DAS and indoor venue Wi-Fi business, believes the addressable market for DAS is about 20,000 more locations (in addition to the sites already installed).

While there are five million commercial buildings in the United States, more than 90 percent of those buildings occupy 200,000-square-feet or less, according to the U.S. Energy Information Administration. That might imply that 30 percent, or roughly 1.5 million sites, are the best candidates for lower-cost CBRS systems providing indoor coverage.

In terms of all small cell venues, there are perhaps 400,000 such potential locations where CBRS provides the same benefits as DAS.

So one way of setting parameters is to assume the number of U.S. venues where either DAS or CBRS makes sense ranges from a low of 20,000 locations to a high of 1.5 million locations, with 400,000 possibly representing reasonable CBRS potential.

Boingo’s business opportunities point up the role of indoor mobile coverage in the mobile ecosystem.

But that is not a new issue, since the advent of deregulation and the end of the monopoly era. Since the breakup of the AT&T Bell System, when indoor and outdoor networks were owned by AT&T, “indoor” or premises networking has been the province of private networks owned by consumers or businesses, while “outdoor” networking has been the province of the service providers.

That is why consumers own their phones and PCs, why Wi-Fi exists, why distributed antenna systems and coming in-building small cell networks, as well as private mobile networks, will exist.

Traditionally, service providers have been essentially barred from owning facilities infrastructure, terminating their networks at a demarcation point on the property. Mobility was the new wrinkle, as mobile networks, to be valuable, must provide service everywhere, indoors and outside.

Still, mobile service providers shy away from investing in in-building infrastructure, for cost reasons. Wi-Fi has eased those concerns to a large degree. And some service providers, especially firms such as Comcast, see new value in “owning” the indoor Wi-Fi experience.

So a big new business question is what new opportunities might exist, in the indoor networking environment, for service providers and others in the ecosystem.

Though it now seems “natural,” virtually all the businesses now associated with private networks, end user equipment and software, consumer and business applications, Wi-Fi and other local area networks have been created only as the end of monopoly phone service era began.

Apple’s device business, the Android ecosystem, Wi-Fi ecosystem, local area networks, cable and satellite TV, the phone interconnect and computing system integration and value-added reseller businesses all exist because the public network was deemed to end at a demarcation point on every customer’s premises.

Though in a regulatory sense the rise of Facebook, Google, Amazon and all other app providers (edge providers) was not enabled by telecom deregulation, they were enabled by legal frameworks that left computing services completely unregulated.

To understand why many firms work to create new roles for themselves, consider that, in the monopoly era, AT&T supplied not only connectivity services, but also the network’s equipment and software; the customer equipment (phones) and owned the inside wiring as well as the rest of the network.

In a revenue sense, AT&T made money building and selling infrastructure (as Nokia, Ericsson and others now do); building and selling the CPE (as Apple, Samsung and others now do) and providing all the connectivity (instead of retaining only a fraction of such revenues).

These days, service providers mostly must rely on connectivity revenues alone, in competitive markets, to generate revenue.

So one way to look at efforts to create additional roles in mobile banking; entertainment services; applications and computing is to understand them as ways of recreating the once more-robust involvement in greater portions of the communications ecosystem.

It is not exactly “back to the future,” but it is close.

Historically, only the public network existed. When U.S. consumers or businesses purchased a phone service, the wiring inside the home and the phones were owned by the telco.

That began to change in 1968, when in the Carterphone decision, people gained the right to use their own equipment on the AT&T network.  

With the breakup of the Bell system in 1984, inside wiring became the property of the building or homeowner. That, in turn, lead to the creation of  private networks (local area networks, for example).

The in-building or campus communication systems, equipment and software became the province of private networks. Where in the monopoly era, all customer premises equipment was produced and owned by AT&T itself, today all sorts of companies produce CPE, and AT&T has gotten out of the business of building either network infrastructure products or CPE.

Ironically, the strategic imperative many telcos embrace is an effort to recreate the “multiple roles in the ecosystem” position they once had in the monopoly era.

After 50 years of shrinking roles in the communications ecosystem, major service providers seek to create new roles offering higher revenues, greater profits and diversified revenue streams, as once was the case.

That does not mean firms want to recreate roles in most of the former areas, such as becoming manufacturers of network infrastructure or end user devices. But firms now seek roles beyond connectivity.

Firms whose roles were legally prohibited, curtailed or opened to competition, are trying to find additional and profitable roles in many parts of the ecosystem that were curtailed or forbidden by the deregulation process of the 1980s and earlier.

But indoor coverage and services might well create many new opportunities for service providers and specialists in the ecosystem as well.

Dish Network Will Play a Role in Rearranging U.S. Mobile and Video Market Share

source: Bruck Kushnick

Facing important decisions about potential consolidation in both video entertainment  and mobile industry segments, Federal Communications Commission decisions, along with Department of Justice antitrust reviews, could trigger other cross-industry consolidation as well.

The immediate issues include the Comcast acquisition of Time Warner Cable, the possible, though unlikely Sprint acquisition of T-Mobile US and a potential merger between DirecTV and Dish Network.

Also in the background are upcoming auctions of former TV broadcast spectrum that likely will limit potential gains by AT&T and Verizon, while favoring Sprint and T-Mobile US.

All those intramodal changes could also trigger intermodal activity, though. Dish Network has been amassing spectrum suitable for building a mobile business based on fourth generation Long Term Evolution.

source: Bruck Kushnick

Dish faces an FCC deadline for beginning and finishing construction of that network, in order to keep its licenses. So there has been logical speculation about a deal with Sprint, for example, to expedite the actual network activation process.

But there are other possibilities as well. Both AT&T and Verizon face some limits on how big their existing linear video services business can grow. And some would question the long term value as well.

Dish Network CEO Charlie Ergen sees a dwindling future for satellite-based video service, and also for fixed network delivered linear video entertainment, as demand shifts to over the top and on-demand delivery.

“In my opinion, the video business for a monthly subscription of $80 to $100 a month is a mature business,” Ergen has said. “We’re losing a whole generation of individuals who aren’t going to buy into that model because they only want one particular show or they want to watch the show wherever they can or they want to watch it on their schedule and so that generation is not signing up to satellite or cable or phone video today.”

“At some point in time, the video business, as we know it today, will change dramatically enough that the current business will go from a mature business to a declining business,” Ergen has candidly said. “Hopefully, we’ll make up for that and in an over-the-top business or a wireless business or other businesses that make sense.”

That, many would argue, explains Dish Network’s effort to buy Clearwire and Sprint, purchases of satellite spectrum that can be repurposed to support terrestrial LTE and H block spectrum purchases.

Though initially some speculated that Ergen was buying all that spectrum, and talking about mobile networks, only to entice a buyer for all of Dish Network, Ergen now arguably is quite serious about shifting his business model.

For AT&T or Verizon, a shrinking fixed network linear video business could make a mobile-centric, over the top and on-demand video service much more attractive, positioning either carrier in a growing revenue segment that would become the successor to the linear video business.

Such a business also would be national in scope, where each carrier now has a limited geographic footprint. Also, should Google Fiber continue to scale its business, AT&T or Verizon would gain some revenue to offset possible losses in the fixed network and video services business.

If the Federal Communications Commission limits bidding on spectrum in upcoming auctions of former TV broadcast spectrum, limiting the amount of spectrum AT&T and Verizon can acquire, there are certain to be correlated actions by Verizon or AT&T.

The Federal Communications Commission seems to be interested in crafting auction rules that would ensure that T-Mobile US and Sprint get a reasonable share of the new spectrum.

This is important and valuable to both carriers as the new frequencies will propagate farther than the higher-frequency holdings that anchor both carriers’ present services. Greater propagation means less capital cost for the transmitting network.

But those bidding restrictions also would limit the additional spectrum AT&T or Verizon could acquire.

To be sure, Verizon has said it has no need for more spectrum for additional spectrum. But Verizon already has invested in assets that would allow it to launch a nationwide, mobile-delivered over the top video service. And that would take lots more bandwidth than Verizon presently controls.

Verizon’s public statements notwithstanding, it almost certainly will be needing more spectrum, not so much for its “mobile communications” services, but for potentially key new mobile video entertainment services.

And that is where Dish Network could come into play. Dish owns enough spectrum to be attractive if Verizon or AT&T are serious about a mobile-delivered, over the top and on-demand video entertainment service.

Keep in mind that Verizon’s FiOS footprint is relatively small, compared that of Comcast and the satellite networks, for example.

One might argue that will happen. The traditional argument--for at least a decade--is that neither AT&T nor Verizon can grow the video portion of their triple-play services much more than incrementally, without acquiring more video share now held by the satellite providers.

No matter how effective the telcos are at marketing video services, they are hampered for a couple of reasons.

The cost of upgrading their fixed networks to handle video is a task now made tougher because the financial return from investing in mobile assets now competes for investment funds, is one limitation.

AT&T and Verizon have very good reasons for caution about capital investment in their fixed networks, even if high speed access and video entertainment services have emerged as strategic applications for fixed networks.

The other problem is that both firms are barred from significant growth by acquisition, simply because of their large share of the telco fixed network business. AT&T’s fixed network might pass about 30 million of 115 million or so U.S. homes, and not all those locations are video-capable.

Verizon passes about 27 million homes. And despite new AT&T plans to vastly accelerate upgrading its networks, perhaps half of all lines operated by AT&T and Verizon fixed networks are not yet upgraded to enable video services.

The point is that AT&T and Verizon will be limited in the number of video subscribers they can attract, simply because their footprints are relatively limited, both geographically and in terms of the cost of upgrading rapidly.

source: BTIG Research

Verizon’s video entertainment customer base, for example, is about five million households. DirecTV has about 20 million customers while Comcast, with Time Warner Cable, would have more than 30 million customers. Dish Network has about 14 million customers.

No matter how effective Verizon is at winning video market share where it has fixed network FiOS assets, the fact is that Verizon’s network footprint is too small, relative to the satellite networks, Comcast or AT&T, to grow its business too much further.

AT&T has about 5.5 million video customers as well. One might argue that the only way either AT&T or Verizon gets significantly more video share is by buying one of the satellite providers.

To the extent that national footprint is helpful, as it has become in the mobile business, national scale arguably would be beneficial in the video business, as both DirecTV and Dish Network are able to take advantage of, in terms of marketing and to some extent in terms of appeal to advertisers.

Not only does Ergen expect demand for linear video to decline, geostationary satellite networks are ill-suited for interactive services.

But to the extent that linear video remains a key revenue driver, acquisition of Dish Network and DirecTV subscriber bases are one of the most-logical ways for AT&T and Verizon to gain scale and revenue volume in the linear video business.

Dish also offers Verizon a service organization outside of FiOS areas that could help Verizon deploy additional mobile broadband capacity and support an over the top mobile video service.

And either AT&T or Verizon would have more headroom to acquire additional spectrum from such a secondary transaction if the FCC revises the “spectrum screen” it uses to ensure diversity of spectrum ownership.

Essentially, the FCC limits ownership by any provider to no more than about 33 percent of available spectrum. In recent days, the Commission has not included 2.5-GHz Sprint holdings in the base, for such purposes.

Many believe that will change, automatically giving AT&T and Verizon more leeway to acquire spectrum in secondary markets (by buying firms with rights to spectrum). Dish Network is the firm with the greatest amount of spectrum to be acquired in that manner.

So watch for big intermodal changes in the U.S. mobile and video services business.

Internet Exacerbates "Competition" Issues, But Competition Still is the Key Market Change

It appears that IP messaging app WhatsApp has passed 250 million users, enough to put WhatsApp in the same league as Twitter (200 million users) and Skype (280 million), in terms of user base.

Others might say the real impact is that IP-based instant messaging services are becoming, for many users,  the primary social graph. That means a potentially important new revenue vehicle is being created.

“For whom?” is the issue, as seems always the case for service providers.

Seemingly endless amounts of speculation and argument will continue to be expended by executives, pundits and analysts about “what service providers should do.” That’s a fair enough question.

What should by now be abundantly clear is the strategic impact on service providers, no matter what they decide to do tactically (participate by buying into the business, create branded versions of such services, fight back by enhancing the value of any existing substitute products, or essentially ignore the attackers).

The analogy and historical precedent is the advent of competition within the facilities-based telecom business, even before the advent of over the top competition. A look at addressable market illustrates the primary change of strategic context.

Back in the monopoly days, a national carrier’s business case was fairly simple. Whatever other assumptions one might have made, the potential addressable market was nearly “100 percent of homes and business locations.”

That had implications for the “cost per subscriber” or “cost per customer” metrics. At very high customer penetration, “cost per customer” and “cost per passing” are fairly closely related metrics.

That is a relatively simple business exercise. Build out network, passing 10,000 new locations, and sign up 70 percent to 90 percent of those locations as customers.

All of that falls apart in a competitive environment. Assume just two strong contestants with networks, equally skilled and with some advantages (telcos with mobile or cable TV with video).

In that case, the math is quite different: build or upgrade a network and sign up perhaps half of those locations as customers. That can nearly double the “cost per customer,” based strictly on payback on network capital.

The other likely effect is an increase in marketing expense.

In other words, the effect of competition is a fundamental change in network economics and profit margin.

Over the top services pose the same sort of challenge. By now, it should be obvious that one clear implication of IP-based competition is that profit gets wrung out of any service or application that formerly was immune from such competition.

So whatever tactical response a service provider chooses to make, it will be within the context of radically-different gross revenue and profit margin assumptions.