"Doom Loops" and Legacy Product Declines

It is not always easy to explain why some ideas and terms emerge at specific times in history. But some terms, including the “doom loop,” have emerged before. A doom loop is a self-reinforcing cycle of negative events that can lead to a catastrophic outcome. 

For long-time observers of the cable TV business, perhaps that phrase is current because a major cable operator now believes “the video product is no longer a key driver of financial performance.” 

source: Charter Communications 

That is a profound change for an industry known as “cable TV.” 

The “doom loop” is fundamentally caused by what Charter Communications considers an unsustainable video model.

We are familiar with the notion of the “vicious cycle,”  a situation in which one bad event leads to another bad event, which then leads to even more bad events. Then there is the phrase “death spiral,” referring to  a situation in which a company or organization is caught in a negative feedback loop, itself another phrase expressing a similar idea. 

In the environmental area, the 18th century Malthusian trap argued that population growth will eventually outstrip the carrying capacity of the environment, leading to widespread poverty and starvation. 

In recent decades we have heard about “the tragedy of the commons,” where individuals acting in their own self-interest deplete a shared resource. 

These days, we are apt to hear the term applied to the declining linear video subscription business. But we also have seen similar ideas expressed form time to time about specific companies in the telecom or connectivity business. 

source: NextTV, MoffatNathanson

One example of a doom loop is the Greek debt crisis. In 2010, Greece's government debt was too high and the country was unable to pay its debts. This led to a loss of confidence in the Greek economy, which caused the value of the Greek currency to plummet. This, in turn, made it even more difficult for Greece to pay its debts, and the cycle continued.

Another example of a doom loop is the 2008 financial crisis. The crisis began when the housing market in the United States collapsed. This led to a loss of confidence in the financial system, which caused banks to become more cautious about lending money. This, in turn, made it more difficult for businesses to get loans, which led to a decline in economic activity.

In the telecom industry, a doom loop can occur when a company's financial problems lead to service cuts, which in turn lead to customer losses, which further worsen the company's financial problems. This can create a vicious cycle that is difficult to break.

One example of a doom loop in the telecom industry is the case of Sprint. In the early 2000s, Sprint was one of the leading wireless carriers in the United States. However, the company began to struggle financially. 

In an attempt to save money, Sprint began to cut back on its network investment and service offerings. This led to customer losses, which further worsened the company's financial problems. Sprint eventually filed for bankruptcy in 2012.

Other leading firms also have experienced doom loops. MCI once was a leading provider of long distance services in the U.S. market, second only to AT&T. But MCI began to suffer as its shrinking long distance business was not offset by growth in local access services. MCI eventually was absorbed by Worldcom, which itself collapsed. 

AT&T faced the same problem, more than once. Its declining long distance business could not be countered by new revenues in local services. Eventually, after spinning off mobile, equipment manufacturing and Bell Labs assets, AT&T was acquired by SBC, which then rebranded itself as AT&T. 

Of course, a doom loop is not necessarily fatal for the company or industry in the loop. 

AT&T has a history of getting caught in doom loops. In the early 2000s, for example, the company acquired several large cable companies in an attempt to become a one-stop shop for telecommunications services and solving its local access business problem. 

However, the acquisitions were expensive and led to a significant increase in AT&T's debt. As a result, the company was forced to cut costs and lay off employees, which further damaged its reputation. In 2005, AT&T spun off its cable business.

Then AT&T decided to reimagine itself along the lines of Comcast, and acquired DirecTV and Time Warner assets. That required taking on so much debt that eventually AT&T had to sell off those assets to pay down debt. 

It perhaps goes without saying that such terms as “doom loop” only arise in connection with legacy businesses that are declining. 

By definition, growing businesses are in positive feedback loops; virtuous cycles or experiencing scale or network benefits. So you will not hear anyone applying such terms as “doom loops” to artificial intelligence.

NextLight Grabs 60-Percent Market Share Competing Against Lumen and Comcast

NextLight, the electrical utility owned internet service provider in Longmont, Colo. says it has gotten 60 percent take rates for its fiber-to-home service, with similar take rates among business customers, after gaining about 54 percent take rates after five years of operation. 

Should many other competitive ISPs achieve such success, incumbent telco and cable operator ISPs could face serious challenges. 

It has been conventional wisdom in U.S. fixed network markets that two competitors are a sustainable market structure, typically featuring one cable operator and the legacy telco, with market shares ranging between a 70-30 pattern (where the telco only has copper access)  to something closer to 60-40 as a rule (where the telco is upgrading to fiber access). 

Telcos hope for market shares approaching 50-50 as FTTH becomes the dominant access platform over time. 

The new issue is additional providers, ranging from municipal or utility-owned ISPs to independent ISPs, including independent ISP operations that cover only parts of a metro area. In a sense, that is the mass market or consumer version of the competitive local exchange carrier strategy adopted decades ago, where suppliers target business customers in major office parks or downtown core areas. 

The American Association of Public Broadband cites 750 municipal internet service provider networks in operation in the United States, mostly serving smaller communities. Not all have full retail operations, though. 

Chattanooga Electric Power claims 175,000 customers in the Chattanooga, Tennessee area. The next-largest 10 such ISPs have fewer customers, often because they are smaller population centers. 

• City of Salem Electric Department (Oregon): 50,000

• City of Longmont Power & Communications (Colorado): 40,000

• Plum Creek Electric Cooperative (North Dakota): 35,000

• Jackson Energy Authority (Tennessee): 25,000

• City of Holyoke Municipal Light Department (Massachusetts): 20,000

• City of Boulder Municipal Electric Utility (Colorado): 18,000

• City of Dubuque Utilities (Iowa): 17,000

• City of Lawrence Public Utilities (Kansas): 15,000

• City of Lexington Utilities (Kentucky): 15,000

 

And other networks are launching in larger population centers. As with any set of contestants in any other industry, not all suppliers will succeed and not all will likely survive. Managerial skill still seems to matter, as do the other prosaic concerns such as managing debt burdens and picking the right areas to serve. 

Many for-profit ISPs now believe they have better opportunities in rural areas, for example, where a new fiber network can be “first” to serve the market. Up to this point few have attempted to compete in a major big city market. ISPs targeting operations in mid-size cities have generally only chosen to serve portions of their cities. 

The obvious broader issues are the roles and strategies traditional retail service providers can envision as their markets are reshaped by competition, new investors and virtualized or other roles beyond the traditional vertically-integrated model. 

The question naturally arises: how many of these new competitors will succeed, and what are the implications for sustainable market shares over time?

In a market with two significant suppliers, each serving the whole market, an ISP might require  market share of at least 30 percent to be sustainable. That has often been the pattern where a cable operator competes against a telco with copper-only access, where the available telco speeds are quite limited in comparison to a cable operator hybrid fiber coax network. In such cases, there is an order or magnitude or two orders of magnitude difference in top speeds. 

In a market with three significant suppliers, an ISP typically needs to have a market share of at least 20 percent to be sustainable, if competition across the full geography is envisioned. Such ISPs also tend to require more efficient operations. 

In a market with four significant suppliers, where we can assume as many as two of the four compete only in a portion of the metro market, an ISP typically needs to have a market share of at least 10 percent (of the full area potential market) to be sustainable, though ISPs serving only a portion of a metro area also probably need take rates higher than 10 percent in the areas they do choose to serve. 

If an independent ISP cannot get 20 percent to 30 percent take rates in its chosen geographical areas of coverage, it probably is not doing well. 

The best suppliers can take so much share from the incumbents (telco and cable) that severe damage to the incumbent business model is possible, turning those competitive areas into loss-making operations. 

A fixed network operator with sufficiently offsetting performance might survive actual losses in a few geographies. In fact, traditional monopoly fixed network suppliers expected permanent losses in rural areas, breakeven or slightly better performance in suburbs and most of the profits from operations in city cores. 

NextLight seemingly has avoided issues of cross-subsidization of internet access service by the electrical utility ratepayers, separating its financial operations from those of Longmont Power Company.

NextLight has its own board of directors, management team, and accounting system.

NextLight seemingly provides service “at cost,” plus a small margin to cover its operating expenses. The objective is to break even, rather than “making a profit.”

NextLight's network is physically separate from LPC's network, though critics might argue NextLight uses power company rights of way and other benefits of having a sponsor with an on-going business, which could translate to financial advantages. 

Others might argue there is some cross subsidy. There is a no-recourse surcharge on LPC's electric bills, used to fund the construction and operation of NextLight, and it is applied to all LPC customers, regardless of whether they subscribe to NextLight service.

That said, NextLight has gotten a legal opinion from the Colorado Attorney General's Office stating that NextLight is not engaging in cross-subsidization, and that the non-bypassable surcharge is a fair and reasonable way to fund the network. 

In fairness, what revenue-generating entity would not look to leverage its current assets to create new lines of business? Cable operators used their video subscription networks to create fully-functional telecom networks; use their fixed network to support their mobile service provider operations; extended their consumer networks to provide business-specific services; used their linear video customer base to leverage a move into content ownership. 

Telcos do the same, when trying to extend their core operations to new services. In the more-regulated era, they had to establish separate subsidiaries to enter non-regulated lines of business. That is less an issue in today’s largely-deregulated markets. 

The city of about 100,000 is about 30 miles north of Denver, so might be considered a suburb by some, a neighboring city by others. Using either characterization, population density varies quite substantially. 

The population density of Longmont, Colorado in its city core is 11,999 people per square mile while the population density of the outlying areas is 1,369 people per square mile  

 

Housing density and population density obviously are key indicators of potential access network cost and revenue possibility. Housing density enables and constrains home broadband market size, while population density is correlated with business revenue potential. 

To a large extent, housing and population density also affect network cost: the lowest-cost-per-passing networks can be built in dense areas while the most costly networks are in rural areas. 

Among U.S. internet service providers, the “average housing density is 400 locations per square mile, with Comcast sitting squarely on that level of density. Smaller telcos tend to serve more-rural areas and have housing densities an order of magnitude or two orders of magnitude less than the largest ISPs. 

Company	Housing Units	Average Housing Density (dwellings per square mile)
Verizon	58.2 million	1,500
AT&T	51.8 million	1,300
Lumen (formerly CenturyLink)	25.7 million	600
Charter	22.9 million	500
Comcast	19.5 million	400
Windstream	14.8 million	300
Brightspeed	1.9 million	40

At least historically, that explains why Verizon was early to invest in fiber to home facilities. It has the most-dense serving areas, so has the best economics. Only recently have many smaller and independent ISPs been able to make a business case for investing in FTTH in rural and exurban areas, though lots of small rural telcos have been doing so for years. 

Housing density	Cost per home passed
40 homes per square mile	$2,000
40 homes per square mile	$800
1,300 homes per square mile	$500

Figures of merit for FTTH construction might range from $1,000 to $1,250 per household at 400 homes per square mile but $1,500 to $2,000 per household at 40 homes per square mile, for example. 

At higher densities of 1,300 homes per square mile, costs might range from $500 to $750 per household. 

The business case also includes less revenue per account potential at lower densities as well. 

All that matters as attacking ISPs and infrastructure investors weigh their odds of success when competing with legacy service providers. To be sure,  FTTH payback models seem to have changed greatly since 2000. 

The economics of connectivity provider fiber to the home have always been daunting, but they are, in some ways, more daunting in 2022 than they were a decade ago. The biggest new hurdle is that expected revenue per account metrics have been cut in half or two thirds. That would be daunting for any supplier in any industry. 

These days, the expected revenue contribution from a home broadband account hovers around $50 per month to $70 per month. Some providers might add linear video, voice or text messaging components to a lesser degree. 

But that is a huge change from revenue expectations in the 1990 to 2015 period, when $150 per customer was the possible revenue target.  

You might well question the payback model for new fiber-to-home networks which assume recurring revenue between $50 and $70 per account, per month, with little voice revenue and close to zero video revenue; take rates in the 40-percent range; and network capital investment between $800 and $1000 per passing and connection costs of perhaps $300 per customer. 

In the face of difficult average revenue per account metrics, co-investment and ancillary revenue contributions have become key. Additional subsidies for home broadband also will reduce FTTH deployment costs. 

The point is that FTTH revenue models, and the ability to sustain a competitive ISP operation, either as an incumbent or attacker, now seem to make possible more competition than was previously thought possible. 

NextLight is a good example.

Which Path for Video Streaming?

It is not yet clear whether video entertainment facing internet disruption will follow the path of the music and print media industries, or somehow can evolve in a way similar to retailing. In other words, will the future video entertainment business be bigger or smaller than the linear business it displaces?

It is conventional wisdom these days that video streaming has failed to replace losses from linear TV subscription declines. In some ways, the comparison is a bit unfair. Streaming is a new business, which means development costs and investments are high, compared to customers and revenue, as generally is true for most new lines of business being created for the first time. 

Linear video subscriptions are a declining line of business, but can be harvested for revenue without undue investments. So we are comparing a declining business with a growing and new line of business. One can harvest revenues from a legacy business. One has to invest to grow a new one. 

Also, in a linear video model, content providers can spend less on delivery infrastructure, as the distributor takes care of that. In a streaming model, the delivery infrastructure has to be built. 

In the linear model, content provider marketing costs are lower, as the distributor takes primary charge of that function and absorbs the cost. In a direct-to-customer streaming model, the content provider has to spend more on marketing and sales. 

There are other differences as well. Customer churn--which increases operating costs--for streaming services is higher than for linear TV services. One big reason is that customers can binge watch a hot new series and then churn off once they are finished. 

Also, a linear video package is itself a bundle, with economy of scope advantages. Most buyers are aware that buying in bulk correlates with lower cost per unit. Unbundling content eliminates much of that advantage. To be sure, any single streaming service remains a bundle of content. 

If you think about one of the main complaints about linear TV, which is that customers pay for products they do not use, you get the idea. The linear bundle increases profits for the whole ecosystem because customers are forced to buy products they do not want, do not use, do not value. 

The economic argument is quite similar to that the industry debated a couple of decades ago: whether unbundled, a la carte network access would at least be revenue neutral compared to the existing cable TV bundle. A la carte sales models imply lower ad revenues, lower subscriber counts and therefore lower subscription revenues. 

In principle, ability to buy content “by the piece or by the episode”  allows customers to buy only what they want. And consumers resonate with that idea. The issue is whether content suppliers can afford to grant access at sustainable prices. Consumers almost always value a bit of content less highly than the content owners selling it. 

Most consumers already have discovered they need more than one streaming service to satisfy their needs. Ironically, that defeats the purported value of “lower prices” for any single streaming service. 

But content scope never is as great as with a linear package, which delivers many networks. Each streaming service is, in essence, a single network. Today, most content providers make most of their money selling content rights to cable TV providers. As that revenue stream shrinks, it is poised to shrink faster than streaming revenues can replace the losses.

source: MoffettNathanson

Of course, the linear video model has gotten more precarious for lots of reasons beyond the existence of video streaming alternatives. As content prices have kept climbing, it was inevitable that the cable TV bundle would reach a level where the value-cost relationship would be seen as unfavorable by a growing number of consumers.

Unbundling video content access almost inevitably leads to higher costs per unit, for suppliers and consumers. It is possible a smaller industry therefore results, as less-popular networks get squeezed out. 

Of course, under some circumstances, unbundling also might allow some niche content to thrive. As has become the case in the music industry, where consumers now buy “songs” a la carte rather than “albums” (a bundle), some niche formats might find a way to survive. 

But that survival also likely will hinge on creation of new revenue and monetization mechanisms, as most bands now make their money from concerts, not selling pre-recorded music. 

For programming “networks” (streaming services as well as broadcast TV or cable networks), survival might require expanded business models where the networks themselves are not required to generate high profits, but enable some other revenue model to to flourish. One thinks of Amazon Prime, where the revenue comes from memberships and higher e-commerce transaction volumes. 

Streaming has not, so far, proven able to replace lost linear video losses. Whether that always will be the case is the issue. 

E-commerce arguably has not led to a smaller retail industry, as much as it has reshaped the fortunes of legacy suppliers. But most would likely agree that newspaper/magazine (print) industry revenues are lower than before the online disruption.

The music industry might arguably also be smaller than before online music distribution. Whether video content follows the path of print media and music, or the pattern of retailing, is not yet clear.

Telcos, Cable Will Keep Trading Market Share

As important as new sources of revenue might be--from edge computing, private networks, internet of things--gains and losses of market share in legacy products will determine the fortunes of U.S. cable and telco contestants, as has been the pattern for two decades.

In other words, what moves financial fortunes has generally been the ability to gain or protect market share. Some 20 years ago, the plan was for telcos to build fiber-to-home networks to take video share as cable took voice share, while holding their own in home broadband. 

What none of the contestants initially saw was that aggregate demand for linear video and voice would decline. That reframed the strategy of "taking market share."

As both voice and video have become declining businesses, the focus shifted to home broadband and mobility services. Cable won the home broadband market share battle, while telcos owned mobility.

Now the new issue is how much share will shift as telcos take home broadband share while cable operators take mobile share. Of all the leading service providers, Verizon and T-Mobile seemingly have the most to gain from 5G fixed wireless, while cable operators have the most to lose from fixed wireless.

Ability to meet customer demand matters in any competitive market, and limited spectrum resources seem to explain Verizon’s struggles to meet demand for 5G in the U.S. market. Ample capacity hleps explain T-Mobile's success.

Over the past two years, T-Mobile, with the most-capacious spectrum resources, has led net account additions, while Verizon, the most challenged, has lagged. That is why C-band assets are important for Verizon: new mid-band spectrum addresses the 5G capacity supply issue. 

source: Ookla 

To be sure, there are other shapers of supply and therefore demand. The quality of 4G network performance, 5G coverage and pricing policies, plus new competitors (Dish Network and cable operators), all shape demand and could shift market shares. 

source: Ookla 

AT&T and Verizon seem determined to raise prices, while T-Mobile notably is capping them. Cable operators are gaining share and might be the long-term challengers to all the mobile leaders, as they have proven to be the key competitors in the home broadband business. 

Connectivity Providers are in a Box

To a signficiant extent, all tier-one connectivity service providers are in the same box: trapped in a highly-competitive business with slow to no growth; with declining profit margins and a "return on investment" problem and lacking the capital resources to make fundamental changes.

AT&T’s forays into media continue to be roundly assailed, but illustrate the problem.

The recent acquisitions and divestitures of DirecTV and WarnerMedia bring to mind earlier “grow the company” efforts that were focused on the core connectivity function, and also cratered, for arguably the same reason: AT&T’s debt burden was too high. 

The strategy might even have been correct, but AT&T could not survive the debt-fueled strategy. And keep in mind "AT&T" has failed in two incarnations: first as a long distance company trying to create local loop facilities; the second time as an integrated provider trying to move beyond a reliance on connectivity revenues.  

In the late 1990s, AT&T made a big move into cable TV, partly to fuel its move into local access services, partly to capitalize on the robust cash flow cable TV was then generating. 

Given the success cable operators have had with broadband access and support for voice services (the networks of the early 1980s were one-way) show the strategy was not wildly off the mark. 

On June 24, 1998, AT&T acquired Tele-Communications Inc. for $48 billion, marking a reentry by AT&T into the local access business it had been barred from since 1984.

When AT&T bought Tele-Communications, the objective was to use those assets to create a national broadband access capability which AT&T did not at that time possess. Recall that the 1983 divestiture of monopoly AT&T created seven local access companies--the “Baby Bells”--while restricting AT&T to long distance. 

When, in 1996 the Telecommunications Act opened all telco markets to competition, AT&T was faced with the challenge of creating a facilities-based local access network capability. That it failed to do so successfully is not too surprising, given the cost of creating an almost-nationwide broadband infrastructure. Think of the continuing cost of creating fiber to home networks nationally. 

Having concluded it had neither the time nor the money to create access networks nationwide, AT&T gambled on upgrading TCI’s cable networks. But the strategy was not the issue, the debt was. 

AT&T also bought Teleport Communications Group, a $500-million-a-year local business phone company, for $13.3 billion; MetroNet, a Canadian phone system, for $7 billion; and the IBM Global Network, which carries data traffic, for $5 billion, as parts of a move into local access. 

But the debt burden was too high and AT&T reversed course in 2004 and sold most of those assets. AT&T Broadband (the former TCI and US West Broadband assets) were sold to Comcast, making that firm the biggest U.S. cable TV company. 

The point is that AT&T could not figure out a way to quickly create a massive facilities-based local access network capability to compete with the Baby Bells and all the other newcomers, after passage of the 1996 Telecom Act. 

As a related issue, AT&T was not able to replicate the success later shown by Comcast in diversifying its product lines beyond the legacy. Comcast now earns significant revenue from content ownership, subscription video, home broadband, business services and voice, where it once relied exclusively on cable TV subscriptions.

AT&T hoped to replicate that feat. Yes, the strategy failed, twice. 

Few--if any--observers note that AT&T has twice been the largest linear video provider in the U.S. market.  The first foray in the 1990s made AT&T the largest cable TV company in the U.S. market. 

The second foray was the purchase of DirecTV, which again made AT&T the largest supplier of linear video subscription services in the U.S. market. 

At the same time, few can recommend any strategy for AT&T--or the other big connectivity providers--that lifts revenue growth beyond a few percent a year. Connectivity is a slow-growth business. If higher growth rates are desirable, that growth almost by definition has to come from outside the traditional connectivity role. 

No firm in the global telco-legacy connectivity industry has really succeeded wildly in that regard. 

By 2005 AT&T itself was acquired by SBC Communications, which promptly rebranded itself AT&T. Yes, AT&T has twice failed to innovate itself out of a box. But it is a box that has imprisoned virtually all global connectivity providers. 

From time to time a segment of the industry, in some regions, is able to grow--for a time--at fast rates. Quite often that growth only compensates for losses in other parts of the business. Mobility growth balancing declining voice revenues is the best example. 

The internet has made matters worse, further limiting the value and revenues connectivity providers can reap while driving value “up the stack” to third party providers. 

Those who castigate AT&T for its strategic failures are too harsh. Debt has been the issue, as the firm never could afford to spend enough, fast enough, to solve its local access problem, or its revenue source problem. 

If any of us were asked whether AT&T could afford to build a national FTTH network--within 10 years--we would rightly doubt it was possible. Even if it had the money, it did not have the time. 

No single firm could afford to spend $300 billion over 10 years to connect even 100 million homes, which is the scale of the problem AT&T faced. 

The first failure was experienced by AT&T the long distance company. The second failure was that of the former SBC Communications, rebranded as AT&T. It always was an unsolvable problem.