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.

Should Telcos Have Gotten into IPTV?

With the news from comScore that U.S. Internet users viewed 11.5 billion online videos in March 2008, a 13-percent gain versus February and a 64-percent gain from March 2007, it probably is inevitable that some observers will question the commitment telephone companies are making to multichannel video entertainment.

In March, 135 million Internet users spent an average of 204 minutes viewing online video. That represents more than 40 percent of the U.S. population. So given the clear trend to more consumption of "over the top" video, it is perhaps inevitable that a reexamination of the video business case should occur logical to some observers.

To put matters simply, some might argue that telcos should not have gotten into entertainment video, much less IPTV, at all.

As someone who has argued that most telcos will not make much profit--if any--directly from video services, but who nevertheless sees no way for telcos to avoid getting into the linear, multichannel video business, here's the rebuttal to the "over the top" video is the way to go argument.

One might--and executives have--similarly debated the wisdom of replacing copper access infrastructure with optical fiber access as well. And the logic is quite similar.

In the access services market, telcos and cable will for some time essentially trade market share. Cable will gain voice share while telcos gain video share. Those are huge markets and the revenue attached to them likewise is huge.

To really take significant share, telcos will have to replace the copper drops with some form of optical access, whatever the "last 100-feet" or "last 5,000 feet" technology happens to be. The decision is a strategic one; not driven by the sheer "return on investment" thesis for the one new service.

In its most-basic form, the argument is just this simple: fiber investments will allow telcos to take enough video share from cable operators to offset voice line losses. It's a strategic answer to one question: "do you want to be in business in 15 years?"

The argument for most telcos (AT&T and Verizon have enough scale to support a different business case) is simply that without fiber access, incumbent telcos will not be able to trade share effectively.

Fiber also creates the foundation for better competitiveness in the broadband access business as well, as speeds continue to increase. But again, that is an "invest to support a business I already have" argument, not an "invest to create a new business" logic.

So back to IPTV. Telcos could have chosen some other delivery platform than IP to support their initial multichannel video efforts. Verizon did. But Verizon also has an optical access network supporting three distinct wavelengths already. So devoting one wavelength for linear video just makes sense.

Other providers have decided that two wavelengths makes more sense (at least for the moment). In that case, on the assumption that an all-digital, all-IP platform is used, IPTV simply becomes one more IP application in a two-wavelength network.

Of course, "IPTV" can mean lots of things. In the sense we have been discussing it, it is just a transmission protocol. Over time, the "IP" platform is important for supporting interactive applications as well, but we are some distance away from the point where "interactive" television features represent material revenue opportunities.

The exception, of course, is targeted advertising. That arguably is a greater opportunity for cable operators than for telcos, at the moment.

Still, should telcos have avoided the fiber investments that make IPTV possible, or should they simply have plumbed for some way to monetize "over the top" video? That's an even less compelling argument.

The most-recent comScore found that 80 percent of online video viewers spent fewer than three minutes viewing video per day. Compare that to the average of more than four hours of U.S. daily TV viewing per person.

And usage is not the big issue. Usage does not necessarily mean revenue for a network access provider, even if it does represent an advertising or subscription opportunity for Web-based content packagers. One might argue that telcos could have invested in their own "over the top" content efforts, but that still rests on the assumption that big pipes exist to deliver that content.

Whatever telcos decide to do in the "over the top" area, they still could not have avoided investing in optical access for other reasons, primarily because virtually all of the new service or application revenues are based on broadband connectivity.

Given that imperative, the payback for optical access in the near term rests heavily on new linear video revenues.

The multichannel video business represents well over $100 billion in annual service provider revenues, exclusive of advertising revenue. All over the top providers together do not likely make more than several hundreds of millions in current revenue.

The other rationale for offering linear video is that the payback from optical access does not rest entirely on revenue gains. Part of the return comes from avoided customer churn and partly from reduced operating costs.

The argument that telcos should never have invested in linear multichannel video can be made. It just isn't clear the revenue upside supports the case. That doesn't mean over the top video isn't a growing opportunity of some type. It simply remains the case, however, that the amount of revenue all other emerging forms of video can generate pale before what is possible by taking some share of the existing $100 billion-plus multichannel video share.

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How Many Linear Video Subs Did Dish Network Lose in Recent Quarter?

Parsing numbers sometimes is a challenge when looking at subscriber gains and losses in the consumer telecom business.

An illustration: how many subscribers did Dish Network gain or lose in its second quarter of 2015? And did HBO lose linear video subs when it launched HBO Now, the stand-alone streaming service?

Dish Network reported losing 81,000 video subs in the quarter, about double the loss of 44,000 subs in the same period of 2014.

But its actual loss of satellite TV customers may have been more like 151,000, according to MoffettNathanson.

The reason is that Dish Network included gains from the over the top Sling TV service in its basic subscriber count.

Dish Network gained 70,000 Sling accounts in the quarter.

When we launched Sling TV, Dish Network expected to get subscribers from three categories, cord-nevers (people who never have bought any subscription video product), cord-cutters (former linear video subscribers) and supplementers who buy linear video and also Sling TV.

“The vast, vast majority of the subscribersthat we take on do not currently have Pay-TV at the time they subscribe to Sling TV,” said Roger Lynch, Sling TV CEO.

That suggests most of the Sling TV net adds are not coming from the ranks of linear video subscribers. But the combined figures also obscure the extent of Dish Network linear video subscriber losses.

HBO says less than one percent of HBO NOW subscribers are former HBO linear subscribers who dropped the linear service to subscribe to HBO Now.

As with Dish Network's Sling TV service, it appears that new subscribers to the over the top subscribers are not cord cutters. 

They are, as Dish Network hoped would be the case,  “cord nevers,” those who never have purchased cable TV.

A broader shift from linear to streaming still is coming. But, at the moment, the linear providers seem to be succeeding at attracting brand new consumers to their OTT services. 

Headline Numbers on Linear Video Hide Other Trends

By now, nobody is surprised to hear that linear video subscriptions continue to drop or that over the top subscriptions are growing. In aggregate, there are more U.S. paid streaming accounts than linear accounts in service.

Net changes in revenue and accounts are harder to describe, as every quarter and year, some new accounts are added on both linear and streaming ledgers, partly because of churn (customers switching providers), sometimes because of moves (accounts are cancelled at one location but possibly added at another location), temporary suspensions.

In fact, linear revenue might actually be growing, even as accounts dwindle.

Netflix has some 55 million U.S. accounts, while Amazon Prime has some 90 million subscribers. All the largest linear video providers together have about 92.2 million accounts.

But since linear subscriptions represent many times more revenue than a typical linear video subscription, revenue losses are happening, even for firms such as AT&T that sell both linear and streaming video, and even when the net change in streaming accounts offsets the loss from linear accounts.

source: Statista

Total revenue is another story, as monthly subscription revenue earned by a linear account can be an order of magnitude greater than the revenue from any single OTT streaming account.

source: Ovum (Informa)

Among the bigger issues is the rate of decline of linear subscriptions, which seems to be accelerating. Net changes (including new accounts and customers switching providers) typically mean the gross losses are less than headline numbers might indicate.

In 2017, for example, the major U.S. providers lost about 1.5 million accounts, up from some 760,000 in 2016, according to Leichtman Research Group.

The big swing was that streaming services owned by the linear providers gained 1.5 million accounts, nearly the amount lost by the two satellite services.

In that case, the net losses by linear providers were about zero, even if the switch was from higher-revenue linear to lower-revenue streaming accounts.  

source: cg42

source: UBS

Video Business Change: Watch for Qualitative Changes

The U.S. linear subscription video business lost more than one million video customers

in 2015, about four times the level of 2014 losses, and the third year in a row that linear subscription TV losses have occurred, according to SNL Kagan.

The fourth quarter improved, with losses no worse than the fourth quarter of 2014. The industry dipped by 15,000 total customers in the fourth quarter.

Mostly, that is noise.

Some observers will suggest that performance reflects a high level of promotional activity on the part of suppliers. Others will conclude that the cord cutting trend has abated.

Not so. The big changes now are going to be qualitative, not quantitative, in the sense of subscriber counts. In other words, OTT suppliers will begin a long march to replicating most of the content richness linear services provide.

So the key changes will not so much be about subscriber gains or losses, but the change in the nature of the relative products. OTT will gain richness, while linear services will offer more-affordable packages with less content diversity.

Cable TV operators lost 599,000 net accounts in 2015, the first time in seven years that the cable TV industry lost fewer than one million accounts. Some will point to telco account losses as a large part of the reason for the limited cable TV losses.

The satellite providers lost 478,000 subscribers during the year, compared to a loss of 39,000 in 2014.

The telco segment ended 2015 essentially flat.

According to Leichtman Research, the big net change in 2015 was that cable TV providers did much better, telcos did much worse.

The top nine cable companies lost about 345,000 video subscribers in 2015, compared to a loss of about 1,215,000 subscribers in 2014.

Satellite TV providers added 86,000 subscribers in 2015 (including Dish Network OTT subscriptions). In 2014 the satellite providers gained 20,000 subscribers.

Excluding the Sling TV gains, DBS providers lost about 450,000 linear subscribers in 2015.

The top telephone providers lost 125,000 video subscribers in 2015, compared to a gain of about 1,050,000 net additions in 2014.

In the fourth quarter of  2015, the top linear TV providers added about 110,000 subscribers, more than the 90,000 added in the in fourth quarter of 2014.

The largest cable companies added about 125,000 subscribers in the quarter, the first quarter for net additions since the first quarter of 2008.

DirecTV net adds of 214,000 subscribers in the quarter were higher than in any quarter since the fourth quarter of 2010.

AT&T U-verse lost 240,000 subscribers in the quarter, compared to a gain of 73,000 subscribers in the same quarter of 2014.

It likely is unwise to assume that the shift to OTT entertainment video has slowed, even if Netflix and others have begun to reach saturation levels. But the bigger changes might come in the form of packaging and pricing, not subscription levels as such.

Look for OTT offers to proliferate, and gradually start to replicate more of the program diversity linear services represent. That is the growth pattern we have seen recently for any number of competitive services.

They start out on the low end of the value continuum, but are available at vastly-lower cost. Over time, value increases. That is going to be the pattern for OTT video as well.

Which Revenue Opportunity is Bigger for Mobile Service Providers: Entertainment Video or OTT Messaging?

Will over the top messaging, or video entertainment, will be a more important revenue source for mobile service providers? And, to the extent revenue is earned, will it be a direct or indirect contributor?

Your answer likely would be different, based on which market is considered. Countries at immediate risk include the Netherlands, South Korea, Japan, Spain, Germany, Switzerland, the United Kingdom, Singapore, and Russia.

At moderate risk are Canada, the United States, Italy, Poland, Australia, Austria, France, and Hungary, according to analysts at McKinsey.

At low risk are most countries, where voice and text messaging remain staples, and where mobile data access adoption remains low, at least for the moment.

Conversely, markets where consumers have eagerly embraced social messaging, where smartphone adoption is high or text messaging tariffs are moderately high are most exposed.

Informa Telecoms & Media has predicted that mobile operators will generate a total of $722.7 billion in revenues from text messaging revenues between 2011 and 2016.

Third-party providers of over the top (OTT) messaging services will earn about $8.7 billion in 2016. That disparity in revenue illustrates the issue. Mobile service providers will lose about two orders of magnitude more revenue than all OTT apps earn.

So even if telcos become significant providers of OTT messaging, and it is not clear that can be done to any significant degree, you might ask whether the effort is better placed elsewhere.

Put another way, if the potential market is 50 cents a month in revenue, while the lost text messaging revenue represents $10 a month, it isn’t immediately clear whether the effort is justified.

Some will argue that new forms of bundled products (carrier OTT plus other carrier products) will prove viable. That assumes the carrier OTT product has enough intrinsic value to warrant buying it.

A carrier can, of course, simply structure tariffs in a way that makes carrier voice, text messaging and carrier OTT messaging a single retail offer. Even then, one might argue the effort (time, people and capital) might offer more substantial revenue impact if deployed in other areas.

Still, some might argue the upside is in “higher perceived value” for the carrier communications package, not direct revenue. That’s a valid strategy, so long as carrier OTT messaging actually gets any sizable traction with customers.

At least for the moment, indirect revenue sources seem the most likely outcome, and perhaps most significant for video entertainment, rather than messaging, even if that appears to be off in the future.

Consider that telcos today earn far more revenue from video entertainment than VoIP. In fact, any gains in telco VoIP are more than matched by losses in the traditional voice business. In fact, over the top messaging and voice alternatives almost certainly will be the main trend, not the earning of incremental revenues from carrier VoIP or over the top messaging.

The magnitude of losses from legacy products will simply be too massive, in some markets, with losses possibly ranging from 20 percent to 30 percent over several years, in both voice and text messaging services. It is very hard to see how carrier over the top messaging compensates for losses on that scale.

People will buy mobile Internet access so they can use the over the top messaging apps, as well as buying larger buckets of usage to watch mobile video. In both cases, the primary revenue upside is indirect, coming in the form of higher end user spending on access packages.

Perhaps the bigger question is whether video entertainment--provided as a service or through a gateway app--could emerge as a significant direct revenue generator, and not simply an application that drives demand for Internet bandwidth.

Much depends on the answer.

Though helpful for mobile service providers, direct video entertainment services, modeled on the subscription video model, such a development could have major ramifications for existing providers of such services, including cable TV, satellite TV and telco TV providers, shifting demand in possibly significant ways.

Does mobile-delivered video entertainment seem likely to replicate traditional linear TV? Most probably would agree that is rather unlikely, simply because point-to-multipoint networks are efficient ways to deliver linear content, while point-to-point communications networks, especially mobile networks, are not efficient.

But future video entertainment might include at least some forms that are passably well suited for delivery even over point-to-point networks. Obviously, recent end user behavior with respect to consumption of YouTube, Netflix streaming and other forms of non-linear video consumption provide a reason for suggesting that sort of behavior could underpin a newer form of video service not dependent on linear delivery (not pushed or broadcast but pulled by viewers).

So it is at least possible that some demand for traditional TV subscriptions could shift to mobile delivery, as a byproduct of a switch to greater reliance on "pull" or content on demand modes.

It wouldn't be easy, but video entertainment remains one of the more reliable applications a service provider can sell.

The number of users globally paying for mobile video and TV services is expected to jump to 534 million by 2014, a five-fold increase from 2008, says Pyramid Research.

Derek Medlin, senior analyst at Pyramid Research, says "this is equivalent to 8.5 percent of all mobile subscriptions, up from the current 2.5 percent level."

"Looking ahead, Asia/Pacific will remain in the top spot, attaining more than 281 million subscriptions by 2014, although we expect Latin America to grow at the fastest pace, increasing at a CAGR of 39 percent from 2009 to 2014," Medlin says. 

Until now, mobile operators haven’t done much to promote mobile video. In fact, under challenged bandwidth circumstances, it sometimes makes sense to actively discourage such consumption.

But Long Term Evolution helps. And broadcast forms of LTE will help more, at least for linear content delivery. The challenges of delivering mobile content are balanced by the size of the revenue opportunity, though.

Worldwide video service revenue (cable TV, satellite TV and telco TV) grew in the first half of 2013 to $110 billion, up two percent over the second half of 2012, despite weakness in the U.S. market, where video subscribers are declining at a pace of 1.5 percent to 2.5 percent annually.

You can make your own determinations about whether that trend indicates non-interest in the product, or simply non-interest in the way retail offers are constructed.

By 2017, Infonetics expects the global video subscription services TV market to hit $270 billion in revenue, a 2012–2017 compound annual growth rate of nearly five percent.

The issue is how service providers can earn revenue from mobile video, which today is largely a potential revenue stream for application providers.

Although only a third of Verizon subscribers are on LTE, those users consume 64 percent of its data, with a “surprising” amount of that being video content, according to Verizon. 

And that's why entertainment video might someday generate far more revenue for mobile service providers than over the top messaging. 

Consumer Demand for Mobile Live TV is Clear

Will linear TV eventually move to non-linear formats? Many believe it will. Significantly, for mobile service providers, one might also argue that the shift to non-linear television formats is especially suited for mobile delivery.

If consumer demand shifts to non-linear modes, then existing consumer behavior suggests mobile delivery will be key.

Mobile video consumption is growing so fast, it could make up half of all online video consumption by 2016, according to Ooyala.

Year over year, share of time spent watching videos on tablets and mobile devices has increased 719 percent since the fourth quarter of 2011, and 160 percent year-over-year since the fourth quarter of 2012.

Separately, Ofcom, the United Kingdom regulator, has found that 69 percent of tablet owners watch video on their devices. Some 32 percent of tablet owners reported watching U.K. or international news, 27 percent sports news and 19 percent local news.

About 29 percent reported watching TV shows, Ofcom reports.

On smartphones, 28 percent watching U.K. and  international news, 25 percent watch sports news and 21 percent watch regional or local news.

That should provide AT&T, Verizon and other mobile service providers with reason to believe they eventually will be able to grow new revenue streams directly related to mobile video entertainment, but also be in position to protect themselves against potential losses in the linear video entertainment business.

The point is that those behaviors suggest existing demand for tablet and mobile phone live TV.

Where once mobile viewing was mostly of short-form video, now long-form content viewing also is growing. About 53 percent of global user mobile viewing time was of video longer than 30 minutes length.

Tablet users spent 35 percent of their mobile viewing time watching video longer than 30 minutes, says Ooyala.

Mobile viewers spent 31 percent of their viewing time engaged with content longer than an hour in length. Tablet viewers spend 19 percent of untethered viewing time watching content at least an hour in length.

Significantly, for would-be suppliers of mobile live TV programming, mobile viewers watched an average of more than 42 minutes of live video per play streamed over the top on connected TVs, and nearly 35 minutes per play on PCs.

That is significant as it shows existing demand for live TV, not just pre-recorded material such as movies or short videos.

Based on average time per play, live streaming video consumption is nearly two times greater than video on demand on tablets. That is another way of noting demand for live TV, as opposed to pre-recorded video.

“Viewers are especially engaged with live sports on mobile, watching three times more live

sports video than video on demand,” Ooyala says.

Arecent Ooyala survey of online video publishers and broadcasters found 99 percent rating the ability to deliver video to mobile and tablet devices as “critical” or “important.”