When Should Telcos be Deregulated in Fixed Line Markets?

source: Leslie Marx

Are there any “dominant providers” of fixed network voice services? One might argue that particular concept, as it applies to “voice service regulation,” is way out of date, and does not reflect reality.

Mobile is the way most U.S. consumers use “voice services,” and new providers--mostly cable TV providers--are the leading providers of fixed network voice services.

Also, high speed access has emerged as the strategic foundation for tomorrow’s business, not voice. 

There, one might arguably maintain that cable TV operators are the dominant providers.

The top cable companies accounted for 83 percent of the net broadband additions in the first quarter of 2014, according to Leichtman Research Group.

Looking only at the 17 largest cable and telephone providers in the US, which serve about 93 percent of all high speed access customers in the U.S. market, about 1.2 million net additional high-speed Internet subscribers were added in the first quarter of 2014.

source: Leslie Marx

The top cable companies added about 970,000 subscribers, while the top telephone companies added about 200,000 net new subscribers.

Given enough time, that will lead to cable TV domination of high speed access in the U.S. market.

The 17 firms collectively serve about 86.5 million accounts. Cable TV firms have about 59 percent of the installed base, serving 50.3 million accounts, while telcos serve 35.2 million customers, representing about 41 percent of the installed base.

In other words, eventually, is it possible that the dominant providers in most markets could be cable TV operators, or other independent providers, such as Google Fiber. At that point, if telcos are laggards in both voice and high speed access, any regulation of them as “dominant” providers will be misplaced.

Of course, telco leadership of the mobile market will have to be considered, in an overall sense. But regulation of telco fixed network services already is growing strained, given the ongoing shift of market share leadership to new providers.

Suppliers with a wholesale access revenue model will want regulation to continue. Others might argue wholesale obligations should be applied to all access providers. The facilities-based providers obviously would prefer that nobody have wholesale access requirements. 

One way or the other, change will have to come. 

How Should Regulators Measure Big Acqusition Competitive Impact?

The proposed big U.S. communications industry mergers (Comcast-Time Warner Cable, AT&T-DirecTV), and the potential additional mergers (Sprint-T-Mobile US, Dish Network-T-Mobile US, Comcast-T-Mobile US) all will be scrutinized for their expected impact on competition in one or more U.S. markets.

But it is hard to quantify the actual consumer benefits of competition in the U.S. linear video entertainment  business, and perhaps equally hard to quantify the impact of intra-industry consolidation (Comcast-Time Warner Cable merger) and inter-industry moves (AT&T buying DirecTV).

One might argue that Comcast buying Time Warner Cable does not reduce video competition because the firms do not actually overlap in terms of present coverage. The deal only increases Comcast scale. But the deal also would increase Comcast share of high speed access to about 40 percent, some argue.

That is a level of market share that normally would draw antitrust and competitive review or rejection.

The AT&T offer to buy DirecTV, by way of contrast, involves no similar levels of concentration, some would argue, as AT&T, even after a successful acquisition, would have 27 percent share of the linear video entertainment market.

Still, regulators will have to assess the potential impact on competition. And one of the issues is how few contestants are required to provide reasonable levels of sustainable competition.

Even most casual observers might agree that two contestants is a bare minimum, three is better and four is better still. At some point, the issue becomes how many contestants are viable, long term.

Some will argue that a duopoly mobile business was insufficiently competitive, featuring high prices and low innovation. On the other hand, some would argue a duopoly fixed network business (cable TV versus telco) has been reasonably effective at producing competitive benefits.

The issue is the additional role played by mobile and satellite TV providers, across the broader market.

There might be only two fixed network service providers of triple play services, but there are four providers of video and four providers of mobile service in most markets, plus two providers of fixed network voice, plus numerous specialty providers of business voice and data.

It is hard, under those circumstances, to predict the competitive impact of removing one video provider from the ranks of suppliers, or allowing one provider to gain 40 percent share of the high speed access market, or shrinking the total number of national mobile providers.

Also, how suppliers compete could change. Competition might shift in some measure to qualitative elements of the experience, as T-Mobile US has done with contracts, device subsidies, international calling and texting.

Service providers might compete less on subscription prices, and more on equipment rental fees and features (exclusive programming, high definition, digital video recorder features, international calling and texting).

More important are “hidden price breaks” for buyers of bundles (double play, triple play, quadruple play). In such cases, price competition is disguised.

The Federal Communications Commission once estimated consumer price savings as high as 15.7 percent, in 2004, primarily from satellite competition to cable TV providers.

Using a different methodology, the General Accounting Office (GAO) compared the monthly cable television rates in six markets with broadband service providers who offered a full range of services including subscription television with six comparable markets without such competition.

Monthly cable TV subscription prices for expanded basic service in five of the six matched markets ranged from 15 percent to 41 percent lower with competition.

Averaging the results, the average price was 22.2 percent lower when competition was present. (Prices for voice telephone service and high-speed Internet service were either less or the same in the competitive markets), one study suggests.

But prices only reflect part of the comparison. Programming lineups have changed as well, so a given price represents availability of more channels. One might argue about the incremental value of most of those channels, but the number of channels available has grown substantially.

Suppliers also note that new features--high definition quality, DVR, subscription video on demand--have been added as well.

Complicating matters further, most consumers these days are buying services in bundles that effectively blur the actual cost of each constituent service. So posted retail prices for single services do not necessarily reflect the actual prices being paid.

Furthermore, competition can occur on either price and value fronts, and that also is hard to quantify.  

When the U.S. airline industry was highly regulated, for example, competition centered on amenities, not price.

Just how much competition could be affected by any of the big acquisitions is the issue.

Some might argue that high speed access and mobile competition matter more, as video is likely to shift to a new over the top mode relatively soon, in any case.

Business Travelers Prefer Wi-Fi, but Cost, Relative to Value, Often is a Barrier

source: iPass

Some 80 percent of 2,202 respondents to an iPass survey of business travelers and mobile workers overwhelmingly preferred Wi-Fi for Internet access, over mobile Internet connections, when working outside the office.

Respondents said Wi-Fi was preferred because it is faster, cheaper, offers higher bandwidth for video and cloud-based applications, and is more reliable than mobile data access.

The biggest advantage of cellular data is availability, but the expense associated with it is high. One reason for that estimation of value likely is “price anchoring,” the tendency for people to compare a price with something else. In other words,prices are relative.

For example, if you are considering any sort of peripheral for your iPhone, you will, without even thinking about it, compare the price of the accessory in relation to the price of the iPhone. Almost anything priced less than 10 percent of the price of the iPhone will seem reasonable.

source: iPass

Almost anything priced higher than that might raise questions about value, related to price. Almost nobody would consider buying an iPhone accessory priced as high as the cost of the iPhone itself, or more than that amount.

That likely is at play when consumers evaluate the cost of short term, transitory use of Wi-Fi, comparing the retail price, and the amount of time that connection can be used, to the recurring price of a fixed high speed access connection or 4G Long Term Evolution mobile Internet access, for example.

If use of an airplane Wi-Fi connection costs $8, or in-hotel Wi-Fi costs $15 a day, and won’t be used more than a couple of  hours, the price, relative to value, is likely to be deemed costly, compared to a connection at home that a whole family can use, priced at perhaps $50 a month.

Likewise, users with an LTE mobile connection might--even with some experience issues--find using the mobile connection already paid for as a better value than using the short-term Wi-Fi connection. Airport Wi-Fi will have the same issue.

Users might evaluate the cost for minutes of use in relationship to the price to use an at-home connection for a month, even if Wi-Fi is the preferred access choice, were price not deemed to be an issue.

Use of transient Wi-Fi, in other words, though preferred, is often deemed too expensive.

Cloud-Based Wi-Fi Access System Launched by iPass

iPass has launched its cloud-based “Business Traveler Service 2.0,”  a cloud-based service delivery model that illustrates the value of “network functions virtualization.”

The cloud-based authentication approach service addresses the “time to gain access” problem when uers log in to 2.7 million hotspots in airports, airplanes, hotels and public areas worldwide.

The iPass service simplifies connectivity for the “Wi-Fi first” business travelers, who can now use a single log-in for Wi-Fi access at iPass locations, from PCs, tablets or smartphones at 3,000 airports and 22 airlines, on approximately 2,150 airplanes flown by 22 airlines, as well as 72,000 hotels and convention centers.

Enterprises using the iPass Business Travel 2.0 service eliminates  the need for employees to

use credit cards to gain access, while also supplying high quality, advertisement-free

Wi-Fi service.

Businesses simply provide a list of users who they would like to access the service, and iPass takes care of the rest.

iPass uses automated messaging to inform users about the service, prompt them to activate their accounts and then keep them engaged in using the service. In addition, iPass takes care of all end user communications and support, as well as providing hotspot information so travelers can find the best Wi-Fi connectivity where they happen to be.

Google’s new plans to create a virtualized Wi-Fi controller network for enterprises and smaller businesses also uses a network functions virtualization or, as enterprises prefer to say, “software defined network,” represent a similar cloud-based approach for providing end users Wi-Fi access provided by retailers and other enterprises.

The Google business Wi-Fi service aims to provide retailers with an easier way to provision Wi-Fi access for customers in stores and other related venues.

What is new here, for both iPass and the proposed new Google business Wi-Fi service, is

the use of cloud-based, distributed control to manage access points, making the enterprise-class gear more affordable and easing the administrative chores associated with local operation of the Wi-Fi network.

Both iPass and Google expect the use of a virtualized control capability--in the cloud--will provide more convenient and faster customer log-in experience.

If Products Have Life Cycles, Do Industries Have Life Cycles?

source: Software Advice

The state of the global telecom business presents a bit of a paradox: revenue is growing, but perhaps unevenly, and there are fewer companies and employees.

The U.S. telecommunications business represented about $586 billion worth of revenue in 2013, up from about $297 billion in 2008, by some estimates, and from $491 billion in 2008.

That latter level of revenue growth represents 15 percent compound growth rates, according to an analysis by Hello Operator Software Advice.

But that growth is unevenly distributed, and some markets are declining. The notable example is Europe, where mobile and fixed service revenue is under pressure and dropping, despite growth in most other markets.

Virtually all products--perhaps all products--have lifecycles. Perhaps most industries also have lifecycles. And that is the challenge represented by Europe.

Though most observers would argue the regulatory and structural context explains Europe’s revenue woes (incentives for investment are low, fragmentation is high and scale is low), the question of telecommunications market “maturation” is germane in all developed countries, where legacy products are being replaced by newer products.

Voice revenue, which used to drive results, now is being displaced by Internet access and video entertainment. Vodafone’s most-recent financial results illustrate the problem.

“In today’s results Vodafone showed that they have been able to capitalize on a strong demand for superfast mobile broadband, reaching almost five million customers on their 4G networks,” said Dario Talmesio, Ovum principal analyst. “Unfortunately, the uptake of data fails to deliver in financial terms: revenues continue to fall for Vodafone Group, meanwhile margins have severely deteriorated.”

source: Software Advice

“While Africa and India are still growing, what Vodafone needs to sort out are the fundamentals of Europe that is 66 percent of the business,” Talmesio said.

According to Ovum, none of Vodafone’s major markets will be growing revenues in the coming years, meaning that they need to squeeze more off what they have.

source: Software Advice

Also, despite the emergence of new service providers in Asia, Africa and South America, the total number of service provider firms has decreased since 2008.

Also, the number of employees in the global industry dropped between 2008 and 2013.

The number of firms in the industry declined six percent while the number of people employed in the industry dropped by 14 percent between 2008 and 2013.

The point is that while the global industry is growing, in terms of revenues, employees and firms, while the industry arguably is contracting in some regions, in terms of revenues, employees and firms.

The bigger question is whether industries have life cycles, where telecommunications might be in its life cycle, and what the replacement industry might be.

T-Mobile US Creeping Past Sprint in Terms of Market Share

T-Mobile US is creeping closer to a rather rare event in the recent history of the U.S. mobile business, namely a shift in leader market share that has any of the leading providers changing its rank.

Some might argue the switch will happen sometime in 2015, if T-Mobile US maintains its present sales momentum and Sprint cannot ignite faster subscriber growth.

In fact, T-Mobile (including former MetroPCS assets) is now the third largest service provider, in terms of smartphone accounts, if share includes prepaid and postpaid accounts.

And nobody can be sure how market structure could change over the next few years, as Sprint ponders a bid for T-Mobile US, Dish evaluates whether to make its own eventual bid for T-Mobile US, or whether another entity makes an effort to buy T-Mobile.

And then there is the issue of what Comcast or cable might do. Some think Comcast could weigh its own bid for T-Mobile US, though that would be a big break from traditional cable company strategy.

Traditionally, cable operators are loathe to provider services on a non-facilities-based basis, and also prefer to offer services on their existing fixed network.Wi-Fi-first is the present direction, but many speculate a wholesale-supported mobile capability might be added.

That wouldn’t have been unusual for most of the history of the U.S. mobile business, which has been highly fragmented in the past.

But over the decade, the U.S. mobile service provider market has been relatively stable. That wasn’t the case in the three prior decades, when the U.S. mobile market was relatively fragmented.

One result of the recent stability is a market structure similar to most other mobile markets in Europe, where there are four leading providers.

Starting about 2000, the current structure began taking shape, with four leading national providers, including Verizon Wireless, AT&T Mobility, Sprint and T-Mobile US.

The present structure did not take shape until after both Sprint and the precursor of T-Mobile US began operations using new 3G spectrum in the mid-1990s, and after a series of big mergers happened starting around 2000.

SBC, the precursor to today’s AT&T, entered the mobile business in 1987 when it acquired Cellular One, then owned by Metromedia.

In 1988, Pacific Northwest Cellular is founded. It later changes its name to VoiceStream, and then was evenually acquired by Deutsche Telekom.

In 1994, AT&T acquired all of McCaw Cellular and started operating using the AT&T Wireless brand name.

Verizon Wireless was formed in 2000 by Bell Atlantic (now renamed Verizon) and Vodafone, owner of “Airtouch.’

Cingular was formed in 2001 by SBC and BellSouth (BellSouth was later purchased by SBC).

Sprint did not enter the national market in a significant way until after 1995, based on new 2 GHz spectrum allowing it to launch its own mobile service. The same was true for VoiceStream, which was acquired by Deutsche Telekom in 2001.

In 2003, the market share rankings had Verizon at number one, AT&T number two, Sprint the third biggest and T-Mobile US number four, measured by revenues. Rankings of the top two providers can flip if subscribers are the measure of share.

The point is that a U.S. mobile market with an increasingly-stable market share pattern is about to undergo the biggest potential period of change in perhaps a decade.

In fact, some might argue that the U.S. market is unstable not only because of proposed mergers and new entrants, but because the market share structure is itself a bit out of line with what one would expect in almost any competitive market.

A typical expected structure would have the biggest company to have market share about twice that of the number-two provider, while the second-biggest firm has market share about twice that of the number-three supplier.

Generally, that is what one has seen in the Organization for Economic Cooperation and Development countries. In fact, in 1998 the pattern was almost classically perfect. By 2003 the pattern had weakened, with the number-one firm generally losing share, compared to the other two top providers.

Recently, in the U.S. market, the top two providers have had nearly equal share, vastly more than the final two contenders. And even if that raises worries about an eventual stable duopoly, no global mobile market actually has settled into such a pattern. At least, not yet.

source: Nakil Sung

source: OECD

U.S. mobile market share before the big consolidation began after 2003 shows the market fragmentation.

Venturebeat

Cable Adds 83% of Net New High Speed Access Customers in 1Q 2014

Why high speed access market share matters: The top cable companies accounted for 83 percent of the net broadband additions in the first quarter of 2014, according to Leichtman Research Group.

Given enough time, that will lead to cable TV domination of high speed access in the U.S. market.

Looking only at the 17 largest cable and telephone providers in the US, which serve about 93 percent of all high speed access customers in the U.S. market, about 1.2 million net additional high-speed Internet subscribers were added in the first quarter of 2014.

The top cable companies added about 970,000 subscribers, while the top telephone companies added about 200,000 net new subscribers.

The 17 firms collectively serve about 86.5 million accounts. Cable TV firms have about 59 percent of the installed base, serving 50.3 million accounts, while telcos serve 35.2 million customers, representing about 41 percent of the installed base.

The numbers are somewhat complicated by the transition telcos are making from all-copper digital subscriber line connections to fiber-reinforced or fiber-to-home access networks.

AT&T and Verizon added 732,000 subscribers on the U-verse and FiOS networks in the first quarter of  2014, while losing a net 638,000 DSL subscribers.

U-verse and FiOS broadband subscribers now account for 49 percent of telco broadband subscribers. Some might argue that means half the existing telco high speed access share is susceptible to churn, unless AT&T and Verizon can get their networks upgraded.

In that regard, AT&T is going to do much more than Verizon. In 2013, about 25 million AT&T access lines were upgraded with fiber to neighborhood facilities, out of about 76 million total locations, by some estimates.

In other words, about 33 percent of AT&T lines had fiber reinforcement. Project VIP originally was slated to cover 57 million households, about 75 percent of locations. AT&T further says it will add 15 million more locations if the DirecTV acquisition is approved, reaching nearly 95 percent of households.

Verizon might have passed about 52 percent of all its households with fiber-to-home networks by the end of 2013. Verizon has halted FioS deployment except where it already had gotten franchise agreements requiring it.

Granted, policy eventually could change. And AT&T is making significant new efforts to upgrade its networks. The need to compete with the likes of Google Fiber could spur both telcos to rethink high speed access investment.

Broadband Internet	Subscribers at End of 1Q 2014	Net Adds in 1Q 2014
Cable Companies
Comcast*	21,068,000	383,000
Time Warner	11,889,000	283,000
Charter	4,778,000	148,000
Cablevision	2,788,000	8,000
Suddenlink*	1,103,100	35,100
Mediacom	984,000	19,000
WOW (WideOpenWest)	756,700	16,700
Cable ONE	484,168	11,537
Other Major Private Cable Companies**	6,450,000	65,000
Total Top Cable	50,310,968	969,337
Telephone Companies
AT&T	16,503,000	78,000
Verizon	9,031,000	16,000
CenturyLink	6,057,000	66,000
Frontier^	1,873,000	37,000
Windstream	1,170,400	(500)
FairPoint	331,538	1,772
Cincinnati Bell	270,000	1,600
Total Top Telephone Companies	35,235,938	199,872
Total Broadband	85,546,906	1,169,209

Sources: source: Leichtman Research