Quadruple Play Will Further Blur Distinctions Between Industry Segments

The distinctiveness of "telco" and "cable TV" industries has been eroding for more than a decade, as many cable companies now sell voice, mobile phone service, Internet access and video, to both business and consumer customers. 

And many telcos sell the same set of services, also to consumers and businesses. Further blurring will happen as the standard consumer offer extends from the "triple play" to the "quadruple play."

The U.S. telecom industry, for example, is more complicated than it used to be, including video entertainment revenues and, by extension, revenues of the formerly-distinct U.S. cable TV industry. The U.S telecom industry now generates about $378 billion in annual revenue.

Excluding cable TV industry revenues, legacy telcos probably generate something closer to $300 billion annually. Mobile is driving legacy telco revenue growth, to be sure.

In 2014, U.S. mobile data revenues alone will cross the $100 billion mark, indicating that mobile data alone represents about a third of all revenues in the legacy telecom business, according to Chetan Sharma.

But it is getting harder all the time to separate cable TV, mobile and the rest of fixed network telecom.

Vivendi has decided to exclusively negotiate for three weeks with cable group Numericable about a sale of a majority of SFR, the second-biggest cable operator in France, to Numericable.

Do mobile operators need cable TV network assets more than cable TV operators need mobile assets? It is hard to say. As the triple-play offer (voice, video and Internet access) has been the mainstay of retail offers in many markets, it now appears the quadruple play (mobile, voice, video and Internet access) is about to emerge as the new standard offer.

If that is the case, a meaningful distinction between cable and telco market segments is going to blur, then disappear.

Separately Vodadone is nearing a purchase of Ono, the largest cable TV operator in Spain, and Vodafone earlier had purchased Kabel Deutschland, the largest German cable TV company.

Liberty Global, on the other hand,l plans to create a pan-European mobile virtural network operator operation, beginning in the Netherlands, Belgium, Switzerland, Austria and the United Kingdom, something Liberty Global has been working on for a year or more.

Liberty Global has preferred an asset light mobile strategy in Europe since at least 2013, when Liberty signed wholesale capacity agreements with Telefonica 02, Orange, Vodafone and Mobistar.

Virgin Media, now owned by Liberty Global, also has had a mobile virtual network operator business in the United Kingdom.

To be sure, most larger service providers in Europe are likely to embark on new acquisition moves over the next several years, to gain scale. In that sense, all assets will be in play--fixed and mobile, cable and telco.

The objective will be to create larger entities, with better economies of scale and scope. The scale will come from amassing larger subscriber bases. The scope will come from acquiring the ability to sell all services to all customer segments.

In the consumer markets, the quadruple play will rule. In the commercial markets, the emphasis will include traditional business communications, but also positioning for emerging Internet of Things and machine-to-machine services.

Will Fixed Network Ownership Separate Mobile Winners and Losers?

Will ownership of fixed network assets ultimately prove to be the difference between market-leading and market-chasing mobile service providers?

Consider that “by far the greatest traffic generated by smartphones or tablets is linked to the use of Wi‑Fi associated fixed networks, rather than mobile networks,” according to the Organization for Economic Cooperation and Development (OECD).  

“Fixed networks have, in effect, become the backhaul for mobile and wireless devices with some studies claiming that 80 percent of data used on mobile devices is received using Wi‑Fi connections to fixed networks,” OECD says.

Communications Outlook 2013 says that revenues from data services are growing at double-digit rates in most OECD countries and, in line with the surge of broadband wireless subscriptions, are now the main source of growth for network operators.

But if traffic offload to fixed networks grows more important, one might argue that owners of fixed network infrastructure will have an advantage over competitors who do not own such assets, especially where mandatory wholesale at low prices is not available.

And advantages will be important. A recent examination of net income earned by the world's largest 100 service providers shows a "flat" revenue trend since about 2007. Under such conditions, most service providers in competitive markets will find revenue growth quite difficult.

That suggests more pressure to acquire firms and merge with other firms, and possibly an advantage for firms owning "offload assets."

Wireless and fixed broadband subscriptions in OECD countries

By Itself, Sprint Will Not Catch AT&T, Verizon, History Suggests

SoftBank CEO Maysaoshi Son argues Sprint must be allowed to purchase T-Mobile US in order to have a shot at massively disrupting U.S. mobile markets.

U.S. regulators are reluctant to allow the number of leading U.S. mobile operators to shrink from four to three.

European regulators face the same issue in France, for example. Operators believe consolidation has to happen, while regulators fear the consequences of reducing the number of service providers from four to three.

SoftBank’s own experience in the Japanese market would suggest Son is correct. When SoftBank purchased the Vodafone assets in Japan in 2006, that operation was the number-three provider, as is Sprint in the U.S. market.

All observers agree SoftBank rather quickly took significant new market share, largely by attracting a larger share of customers than its competitors.

Vodafone’s Japan mobile assets, when purchased by SoftBank, had market share of about 17 percent. On the other hand, Vodafone’s business had fallen from a high of about 19 percent market share in 2003.

Today, SoftBank has about 20 percent share of market.

So, In other words, the net swing in market share since 2006 (eight years) has been about three points, though only one percentage point from the 2003 high.

Granted, SoftBank is growing at the expense of KDDI and NTT. But that is a rather long, slow grind, not a whipsaw and dramatic share shift. And SoftBank remains some distance away from number-two KDDI, which has 28 percent share, while NTT Docomo has 50 percent market share.

Some would argue that, globally, most mobile markets feature rather extreme concentration of market share by two providers. A share of between 25 percent and 70 percent would be within the range of expectations, with share in excess of 40 percent held by the number-one provider in Organization for Economic Cooperation and Development countries.

Others would point to flat revenue growth for tier-one service providers globally, though there are exceptions. Since about 2007, revenue for the top-100 firms globally has been “stagnant” to “declining.”

There are clear implications, namely the growing need for scale to offset declining gross revenue and profit margins in a growing number of markets.

“We need a certain scale, but once we have enough scale to have a level fight, OK. It’s a three-heavyweight fight. If I can have a real fight, I go in more massive price war, a technology war,” Son said on the Charlie Rose TV show.

Without T-Mobile US assets, Sprint cannot rapidly and massively challenge either firm, Son has said. That is partly a view based on SoftBank’s experience in Japan.

SoftBank’s own history in the Japanese market, and the recent experience of Illiad’s Free Mobile in France, might suggest that even a fearsome attack by a number-three or number-four service provider can succeed only to a certain extent.

Who Does Sprint Compete With?

“Who does Sprint compete with?” is a question SoftBank CEO Maysaoshi Son will try to get regulators to think about as he gives a speech to the U.S. Chamber of Commerce on March 11, 2014.

Facing skepticism about a Sprint bid to acquire T-Mobile US, which would reduce the number of national mobile providers from four to three, Son will try to reframe the issue, focusing instead on whether consumers would be helped by the gaining of a third national competitor to telco and cable TV fixed network Internet access services.

Son hopes the reframing will shift thinking from market structure in the mobile business to market structure in the fixed network Internet access business.

Whether that clever bit of “spin” will have any impact is the issue. Regulators are likely to argue that if that was what Sprint really wanted to do, it could do so already.

And, in fact, to a large extent, mobile Internet access already provides most of the access, in terms of number of connections, everywhere.

One might bet that the effort to re-frame a potential merger will have no impact.

Google Fiber, AT&T Fuel Gigabit Network Trend

Google Fiber says it is considering expanding the footprint of its gigabit access networks beyond Kansas City, Mo. and Kansas City Kan., Austin, Texas and Provo, Utah, to some additional metro areas, with nine regions now being investigated.

Separately, AT&T says it will build a fiber to the home network in Dallas. Both illustrate the growing gigabit network trend.

AT&T now says it will build fiber to the home networks in Austin, Texas and Dallas, capable of delivering speeds up to one gigabit per second, at least in Austin.

AT&T has not yet specified speeds for Dallas, but it is reasonable to assume gigabit services will be the draw.

The U.S. Federal Communications Commission has suggested a goal of 100 million U.S. residents having access to 100 Mbps Internet access service by about 2020. Some might have thought that a bit of a stretch. It no longer seems so remote.

Technology Futures, a firm with an extraordinary record of broadband predictions, now argues it is reasonable to expect that half of U.S. broadband access users will be buying 100 Mbps connections by about 2020.

Technology Futures also predicts that about 10 percent of customers will be buying 50 Mbps connections, while 24 percent will still be buying 24 Mbps service.

That might seem a crazy amount of bandwidth for “many typical users,” but standard technology forecasting techniques have, for more than a decade, actually suggested that would happen.

In 2001, for example, Technology Futures predicted that by year-end 2004, over 25 percent of U.S. households will have adopted broadband services, up from about five percent at the end of 2000. The actual U.S. broadband penetration rate was 30 percent, according to the Pew Internet and American Life Project.

“By 2010, we expect that the percentage will exceed 60 percent,” Technology Futures predicted in 2001. The actual penetration wound up being 66 percent.

So widespread 100-Mbps access by 2020 seems increasingly possible. Competitive pressure is forcing AT&T, among others to invest in faster access networks.

And subtle but important changes in thinking are likely to help. In the past, would-be ISPs have faced time-consuming and cost-inducing “make ready” costs when considering access network builds. But Google Fiber provides incentives for municipal authorities to cut those costs.

Google Fiber’s investigation of possible new Google Fiber networks in nine metro areas focuses on three key infrastructure items Google says will make construction more efficient, and increase chances a metro area will get Google Fiber.

The checklist covers some concerns are traditional for cable or telco access providers: access to municipal poles and duct work.

Such access is more or less routine, but Google Fiber will go where there is room on poles and in ductwork, especially where a metro area contains several municipal entities. And Google wants municipalities to do the work of gathering all that information, both municipal-owned and private assets.

Likewise, Google Fiber wants “accurate information” about utility poles, conduit and existing water, gas and electricity lines. Again, you might think that is routine, but it can be time-consuming for a would-be access provider to dig up all the information. Google also wants municipalities to help Google get conduit and pole access in an efficient and timely manner.

The third concern concerns the efficiency of permitting processes, which could entail thousands of separate construction permits, as well as identification of locations where cabinets can be sited.

Google Fiber wants municipalities to streamline those processes so construction can start faster.

That is likely to result in most municipalities streamlining all make ready tasks, to the benefit of all other ISPs looking to build next generation fixed access networks.

Gigabit Access Networks are Becoming Table Stakes

AT&T, which now finds it must deploy gigabit networks in some parts of Austin, Texas, as a counter to Google Fiber, now believes the economics of spot builds are attractive enough that it is moving ahead with fiber to the home deployments in other areas, such as Dallas.

It is unclear what the initial activated bandwidth will be in those areas, but the incremental cost of a gigabit service, compared to 300 Mbps, might be less than was the case just two years ago.

The major cost component of offering a Gigabit is the physical construction of the access network cables, not the optoelectronics.

Arguably, once that is done, the incremental cost of offering 1 Gbps as opposed to 100 Mbps “comes down to slightly more expensive ports, slightly more expensive routers or CPEs and bandwidth provisioning,” argues Benoît Felten. co-founder of Diffraction Analysis.

Various regulators in Europe and North America have estimated the latter incremental cost of gigabit networks cost to be in the 10s of cents per subscriber per month, Felten argues.

Traditionally, ISPs have not wanted to overprovision bandwidth that cannot be monetized relatively quickly. But market conditions in a growing percentage of U.S. markets arguably have changed with the advent of Google Fiber.

Overprovisioning might be necessary in competitive markets where at least one other provider has moved ahead with a symmetrical gigabit offering.

Fiber to the home might be viewed tactically, in terms of what new incremental revenue can be generated, or how much operating costs can be reduced. But sometimes, fiber to the home has to be viewed strategically, not in terms of incremental revenue, but in terms of avoiding massive customer defection, which might imperil asset prices and even ability to continue as a going concern.

In large part, one might argue, that is what now is changing for AT&T and other telcos or cable companies. It isn’t so much that the economics of fiber to the home have dropped so much, or that the incremental costs of gigabit access networks have changed dramatically, but rather that market conditions have altered.

Gigabit networks are, in a growing percentage of markets, becoming “table stakes.”

T-Mobile US and Sprint are in More Trouble Than Some Think

We typically look at the U.S. mobile market in terms of subscribers and revenues. But that might provide a less-robust estimation of the positions of market leaders than one might suppose.

For example, whether one measures by revenue or subscribers, AT&T Mobility and Verizon Wireless represent about 61 percent of all share in the U.S. mobile business. Between them, Sprint and T-Mobile US have about 30 percent share of subscribers.

But gross revenue and subscriber counts are only part of the story. Profits (earnings before interest, taxes, depreciation and amortization) tell another story.

Sprint lost money in 2013. T-Mobile US had about $5.3 billion in earnings before interest, taxes, depreciation and amortization, in 2013.

But AT&T had 2013 mobile segment EBITDA of $25.4 billion. Verizon had mobile segment earnings of $34 billion.

In other words, AT&T and Verizon had 92 percent of earnings among the top four U.S. mobile providers (excluding all profit from AT&T and Verizon fixed network services).

The point is that no matter how one views the desirability of Sprint and T-Mobile US merging, the smaller carriers are dangerously far behind the leaders in terms of profitability.

And if you believe market share and profitability tend to be correlated, that means big trouble for both Sprint and T-Mobile US, over the long term.