What Drives "Cord Cutting" and "Cord Avoidance?" Will Lower Prices Make a Difference?

Some 14 percent of U.S. households do not buy a linear video subscription, according to a new study by The Diffusion Group, up from about nine percent in 2011.

That has many linear video service providers trying to create lower-cost packages, on the assumption that price is the issue (actually price for perceived value). But lower prices might not attract buyers who do not value the product.

At this point, most observers would expect that "declining subscriber" trend to continue, driven by customers who decide they can live without the product, and those who so far never have bought the product.

About 6.5 percent of U.S. households have cut the cord, meaning they used to buy a linear video service but no longer do so. On the other hand, those statistics do not include respondents who never have purchased a linear video service.

The differences between the two groups--those who used to buy, and those who never have bought--are so pronounced that any company targeting these consumers must think in terms of two distinct packaging and pricing strategies, according to Michael Greeson, TDG president.

It often is tempting simply to say such cord cutting or cord avoiding behavior is driven by younger consumers. That is not an unreasonable observation.

Millennials are significantly more likely than their older counterparts to not subscribe to cable or other pay TV services. In fact, 18-34 year olds are 77 percent more likely than average to be a cord never” household and 67 percent more likely to be a “cord cutter” household.

But the issue is a bit more complicated. In fact, it is not clear whether the causation or correlation is household size or parental status, even more than age.

Some 60 percent of single-person households and 52 percent of households without children are “cord never” households. So single-person homes, and homes without children, are highly correlated with refusal to buy linear video service.

And that arguably is the bigger problem for linear video providers. Though some customers desert, others simply have never had any reason to buy the product. The difference is substantial.

The former group might be behaving in a way that suggests “I like the product, but it costs too much,” while the latter group is behaving in a way that suggests “I don’t find your product compelling enough to consider buying.”

More-affordable linear packages might turn the former into buyers again. That is not likely to work for the latter group.

What is so far largely untested is whether an over the top linear programming service would be substantially more favorably received by cord never households. It isn’t hard to imagine why the question exists.

About 40 percent of U.S. households subscribe to a paid digital video subscription service,

with Netflix being the leader (32 percent), followed by Amazon Prime Instant Video (19 percent) and Hulu Plus (9 percent).

Across all of these services, Millennials have significantly higher subscription penetration, with nearly half belonging to Netflix. That suggests a possibility that shifting former linear delivery services aimed at TVs to over the top services aimed at PCs, tablets and smartphones could represent a different, and more-attractive proposition for cord nevers.

Among Netflix subscribers, the preferred method of watching (44 percent) is through internet-connected TV devices such as Apple TV and Google Chromecast.

Computers (27 percent) and gaming consoles or Blu-Ray players (21 percent) also have strong levels of preference among the Netflix subscriber base.

On the other hand, the issue of household size and presence of children in the home could still be a key issue.

Netflix subscription has a strong relationship with household size, with the presence of children in the household likely a key factor. Among one person or two person households, Netflix penetration is less than 25 percent, but penetration jumps significantly to well over 40 percent among households of three and greater.

The point is that it remains unclear whether over the top streaming services or cheaper linear video services will appeal to each of the two groups (former buyers and those who never have bought).

The former might respond to a better value-price proposition. The problem with the latter group is that some might not value the product enough to pay. It isn’t the price; it is the product itself which is unwanted.

Retail Pricing Will Determine Gigabit Demand

By now, it is clear that a shift to gigabit Internet access speeds is no mere matter of a few “hero” tests here and there, but the next evolution of the Internet access business in many markets, with a pull-through that will boost speeds into the hundreds of megabits range in communities where demand or cost make gigabit investments difficult.

Google Fiber, which most would credit for driving the change in the U.S. market, has not had to grapple with demand issues in the same way that incumbent Internet service provider might have, for one reason.

Google Fiber, in pricing its symmetrical gigabit service at $70 a month, has largely eliminated the cost barrier. Consumers who had been paying, or are aware, that a faster service can cost $80 a month or more, will not face “value-price” hurdles at that level of retail pricing.

Earlier belief on the part of many ISPs that there actually was little demand for gigabit access services were right, as far as their own offers. Few consumers were anxious to pay $100 to $300 a month for a dramatically-faster service, when a service costing $40 to $80 was deemed adequate.

The point is that demand for gigabit access very much hinges on retail price. So even if a recent survey of ISPs conducted by Broadbandtrends found the “number one challenge for offering gigabit broadband services was unclear customer demand,” that is likely because the proposed gigabit services were not being offered at price points similar to Google Fiber.

In point of fact, demand for a gigabit service costing $70 should not be markedly different from demand for any high speed service costing close to $70 a month. The issue is what percentage of existing customers pay just $40 for lower-speed services, and what percentage pay higher amounts.

A 2013 survey by the New America Foundation found that in the U.S. market, the best deal for a 150 Mbps home broadband connection from cable and phone companies is $130 a month, offered by Verizon FiOS.

On average a 45-Mbps connection cost about $90 a month, a study by the New America Foundation suggested, even if some might note that pricing is complicated when extracted or interpolated from a triple-play bundle, where there actually is not a fixed price for the high speed access component.

The point is obvious, though. Demand for gigabit access hinges on the price point. If a customer is willing to spend $90 for 45 Mbps access, there is little reason to believe that same customer would not be willing to spend $70 to $90 a month for a gigabit service.

The harder decision would have to be made by a consumer paying perhaps $45 a month for 18 Mbps service.

In the consumer Internet access business, speed has grown an order of magnitude every five to seven years or so. If that continues--and so far the trend is quite linear--a gigabit by 2020 would not be uncommon, in parts of most major markets.

Still, the Broadbandtrends survey suggests ISPs have a significant amount of uncertainty about anticipated take rates for gigabit broadband, particularly among incumbent telco respondents.

One might suggest that is because the installed base of customers are paying prices that make a gigabit alternative more expensive. In other words, ISPs think--likely correctly--that many consumers might conclude a “good enough” service for $40 beats a “best in class” offer costing $70, or about 75 percent more.  

The survey also found “a surprising low percentage of respondents” are using pre-registration to determine build priority for gigabit service.

More than half of respondents are currently offering gigabit access to businesses and Institutions, while 34 percent are offering such services in the residential market

“Being perceived as a technology leader was the overwhelming driver for gigabit broadband deployments, said Teresa Mastrangelo, Broadbandtrends principal analyst.  One suspects that is primarily an issue for commercial providers.

“For some operators, particularly municipalities, gigabit broadband is proving to be the foundation that can improve and enrich education, healthcare and public services as well as the economic engine for growth, investment and job creation,” said Mastrangelo.

Respondents suggested cloud-based backup and support for Ultra HD (4KTV) were the emerging new apps that could drive gigabit adoption.

That might not ultimately be as important as the tariffs ISPs offer.

FCC Might Widen the Crack in the Dam Holding Back the OTT Video Business

You might get a robust argument about which elements underpinning the video business are "most" crucial for success. Regulators have to enable a framework, capital has to be raised, networks have to be created, end user demand must exist, services marketed and fulfilled and value propositions must be aligned with costs.

Still, ability to lawfully obtain content rights has been a problem for over the top streaming service providers, and the U.S. Federal Communications Commission might be on the cusp of making that a relative non-issue.

Some might say a crack has opened in the over the top video business, with the moves by HBO and CBS to create stand-alone video streaming services. But both those efforts are OTT services owned directly by the content owners, not third party distributors.

The challenge for would-be third party distributors has been the difficulty of getting content rights from the popular linear video networks. And that is what could change.

It isn’t yet clear what mix of streaming and on-demand access will be supported by the new services, but the big impact will come if HBO and CBS make available all the programming normally obtainable on linear versions of HBO and CBS.

There might be some argument about the relative value of linear over the top versus on-demand formats, but a linear format would be useful to at least some consumers, some of the time, as it allows marketing of either service on a “same product, less cost” basis than would be the case when either product is bought as part of a linear video subscription.

Up to this point, however, any number of would-be providers, ranging from Sony to Dish Network, have found content rights a barrier. Whatever the thinking about the long-term distribution market, any network widely carried on cable, satellite and telco TV networks would think very hard about jeopardizing the lucrative current business, for what most expect would be a smaller business, overall.

But the Federal Communications Commission might relatively soon move to make content rights less burdensome.

In Title VI of the Communications Act, Congress created rules to ensure that cable companies that own video content can’t raise artificial barriers to competition by refusing to let their video competitors have access to the programming they own. The rules allow apply to local TV broadcasters, who cannot refuse to license their content, if reasonable commercial terms are offered.

Those rules helped the satellite industry create a competitive offer, and now also telco TV providers. The FCC wants to include over the top streaming services within that framework, a move that would essentially compel cable-owned networks, and local broadcasters,  to license content to streaming providers, on relatively equivalent terms.

In other words, new streaming buyers would pay about as much as linear distributors would pay, at equivalent volumes.

Chaiman Tom Wheeler has asked the Commission to start a rulemaking that would update access rules pertaining to “multichannel video programming distributors” (MVPD) that would include over the top streaming providers, not just satellite and telco TV partners.

The result would be that streaming services using the Internet (or any other method of transmission) have the same access to programming owned by cable operators and the same ability to negotiate to carry broadcast TV stations that Congress gave to satellite systems and then to telcos.

That rule change, if adopted, would not directly alter the economics of the streaming business. But the change would mean would-be streaming service suppliers would be able to negotiate contracts giving the OTT providers much of the programming supplied by linear distributors.

In the past, a video service provider had to won access facilities to qualify, but the new rules obviously would have to eliminate that distinction, making content access equivalent for OTT app and service providers and facilities-based cable, satellite and telco providers.

In one way, any such rule change would eliminate a political (business) problem for the content networks, who have been reluctant to jeopardize their lucrative distribution agreements with cable, satellite and telco TV distributors.

Under the new rules, that essentially becomes a lesser problem, as many of the networks would simply be following the rules, and would have no choice in the matter.

In the end, the ability to create a sustainable business model does not change. But the challenge of trying gets easier.

Will Prepaid Conversions to Postpaid, or Tablets, Drive Growth?

At the moment, it is hard to say whether tablets or phone accounts will drive postpaid net additions for the leading U.S. mobile service providers over the next several years.

It is possible that T-Mobile US will be phone-driven, while AT&T and Verizon are tablet-driven. What might happen at Sprint is not clear.

Nor is it so clear whether the steady growth of prepaid accounts will continue so clearly, either. Prepaid accounts have grown steadily as a percentage of total accounts, over the past decade.  

In fact, most observers likely would bet that U.S. prepaid accounts would continue to grow, as a percentage of total mobile accounts.

As of the end of the second quarter of 2014, there were about 74 million prepaid subscribers in the United States. Some might estimate the total as high as 100 million. The point is that prepaid subscribers have grown steadily for quite some time.

That does not mean the largest four U.S. mobile service providers have grown in the same way.

Although prepaid is a mainstay of many regional service providers or prepaid specialists, where gross additions are dominated by prepaid, postpaid continues to be the mainstay for AT&T and Verizon. Prepaid is more important for Sprint and T-Mobile, some might argue, but not the main driver of subscription account growth.

The new twist is that Sprint seems to have made a decision to try and convert more prepaid accounts to postpaid. By extension, some might argue, T-Mobile US phone account growth is driven, at least in part, by former prepaid users opting for postpaid service.

The new potential issue is whether tablets or prepaid conversions will represent the bulk of postpaid account revenue growth for the largest-four mobile service providers over the next several years.

That potential trend already can be seen in the highly-competitive Western Europe mobile market as well.

Since at least 2008, mobile operators in Western Europe have tried to shift subscribers from prepaid to postpaid plans.

The number of contract subscribers in the region increased by an average of 7.7 percent annually between 2007 and 2010, rising from 41.5 percent to 47.4 percent of total connections.

In contrast, prepaid connections dropped by an average of 0.5 percent a year over the same period, according to the GSMA.

Of 89 operators in Western Europe studied by GSMA between 2007 and 2010, some 73 percent increased their ratio of contract-to-prepaid connections during the period, many would argue, because the gross revenue difference between postpaid and prepaid accounts narrowed so much.

So the potential coming issue is whether the U.S. market might also shift in a similar way.

In 2011, the U.S. prepaid market still was growing. By 2012, U.S. prepaid subscribers might have hit a peak, even if analysts virtually universally predicted continued growth of prepaid plans.

But Ericsson argues the distinction between postpaid and prepaid is becoming less relevant.

At the same time, tablet additions have driven growth for AT&T, Verizon and Sprint in recent quarters.

Strategy Analytics, for example, estimates that 50 million tablet subscriptions will be added between 2014 and 2018. That might be the volume driver for AT&T and Verizon.

On the other hand, many would note a developing trend of conversion of prepaid accounts to postpaid, at least at some leading U.S. mobile service provider companies. That is more likely to affect or help T-Mobile US and Sprint.

And any trend where prepaid accounts are shifted to postpaid should affect growth rates for the prepaid specialists.

That would reverse a decade or more of thinking that prepaid was destined to take a larger share of overall subscriptions, and also create a situation where it is not so clear whether prepaid conversions or tablet additions are the growth driver for the top four service providers.

Tablets with mobile Internet subscriptions using 3G and 4G LTE will grow more than five times in the next five years to reach nearly 250 million in 2018 at a global level, according to the Strategy Analytics.

Strategy Analytics predicts there will be 247 million tablet subscriptions by 2018, up from 45 million in 2013.

Verizon Wireless, Sprint and AT&T combined added nearly 1.5 million tablet subscriptions in the first quarter of 2014, for example.

That implies a growth rate of about 25 percent a year.

T-Mobile US is the clear outlier at the moment. T-Mobile US reported its “biggest growth quarter” ever in the third quarter of 2014, adding 1.4 million branded postpaid net new accounts, of which 1.2 million were phone accounts.

Consider those results with AT&T and Verizon in the third quarter. AT&T, in the same quarter, added about two million net new accounts. About 1.27 million of those connections were tablets. So AT&T added about 730,000 net new phone accounts.

So T-Mobile is adding phone accounts, AT&T mostly tablet accounts, on a net basis.

Verizon added 1.53 million retail net connections, but only 457,000 phone accounts. The other 1.1 million net additions were tablet connections.

Whatever else you might say, T-Mobile US is adding the most net new phone accounts, assuming Sprint third quarter net adds are about as expected.

The shift of subscriber growth to tablets is significant. In part, that shift reflects deliberate marketing efforts by AT&T and Verizon to encourage phone customers to add mobile connectivity for their tablets.

But that same logic might hold for Sprint, which wants to convert more prepaid accounts to postpaid accounts. T-Mobile US arguably benefits less directly, to the extent it markets postpaid service similar in price to prepaid.

More important, the shift to tablet net additions is one more sign of maturity in the U.S. mobile market: almost everyone who wants a phone already has one.

In another sense, the shift to tablet connections (“connected devices”) represents another probable trend. As the mobile industry, over time, starts to sell more sensor connections (for Internet of Things or machine-to-machine applications), average revenue per device is likely to fall.

Already, where a phone account might represent $40 to $80 of monthly revenue, a tablet might represent about $10 a month revenue. In today’s market, a single sensor connection might represent $3 per month revenue.  dri

"What is Broadband?" Could Affect U.S. ISP Market Share

Words matter, the old adage suggests. So do definitions, others might add. One case in point is the possible Federal Communications Commission action to change the definition of “broadband.” At the moment, the FCC uses a definition of 4 Mbps downstream, 1 Mbps upstream.

But the FCC reportedly is considering raising that definition to 10 Mbps, or some suggest, as high as 25 Mbps. Changing the definition would have direct impact on federal support payments for universal access and would change reporting on the status of U.S. high speed access.

But there are other potential implications. Though typical access speeds are growing in the U.S. market, high speed access market share disproportionately is held by cable operators, the reason being that cable services using DOCSIS 3.0 are faster than possible using digital subscriber line.

That is not necessarily true of fiber-to-home services, but the high reliance on DSL by U.S. telcos has lead to a situation where cable providers supply the overwhelming share of faster connections, a situation that also prevails in the U.K. high speed access market.

Basically, cable supplies most of the fastest connections.

So imagine the potential impact if high speed access definitions are revised upwards to 25 Mbps, a figure probably less likely than a shift to 10 Mbps. In the instance where the new definition is 25 Mbps, cable suppliers will capture more share of the overall high speed access market, as millions of telco lines would likely no longer qualify as “high speed.”

Some think that Comcast, combined with Time Warner Cable, might, using the 25 Mbps minimum definition, have as much as 50 percent of U.S. market share for high speed Internet access.

That would be a troublesome figure for an antitrust official to contemplate, especially if high speed access is deemed to be the anchor service for any fixed network services provider.

Using the current definition, a future Comcast that has acquired Time Warner Cable would have 40 percent market share of high speed access. Some would note that already exceeds the level of share antitrust authorities consider “competitive.”

Using the 25-Mbps definition, Comcast’s share would be even higher.

In principle, periodic definitional changes make sense for an agency trying to spur faster and more widespread broadband.

By effectively creating tension between goals and the present status, the FCC can encourage continual progress. The FCC does so directly by using definitions that cause universal service fund recipients to build to a higher standard, for example.

But there are other potential effects. Changing the definitions also changes market share calculations. And that matters, when mergers and acquisitions are weighed.

Verizon Offers Free Year of Netflix with New Bundle

Verizon now is offering a free year of Netflix for new customers buying a $89.99 triple play service.

That offer includes symmetrical 75 Mbps high speed access service, a $150 Visa gift card and a full year of Netflix.  

BTIG analyst Walt Piecyk thinks the marketing message is noteworthy. Though a major supplier of linear video subscriptions, Verizon actually does not mention that fact as part of the promotion.

Instead, the new offer banks heavily on high speed access and over the top Netflix. What that means is that Verizon is dead serious in viewing linear video as a product with less relevance for future revenue than over the top video.

And OTT video has relevance not because it contributes direct revenue, but because it drives buying of high speed access, and Verizon believes it will be able to tie consumption and revenue together in some relatively direct or linear way.

That is not to say linear video is unimportant at the moment. In fact, linear video is the key additional product for a fixed network consumer product bundle, even if linear video is a product with challenged growth prospects.

It is no mistake that Google Fiber sells high speed access and linear video entertainment.  

Dish Network, for its part, had earlier offered six months of free Netflix as a promotion, not so much because Dish could sell more high speed Internet access subscriptions, but simply on the strength of Netflix as a content store.

The point is that service providers (telco, cable, satellite, ISP) need a strategy for dealing with video. That means offering linear video, supporting OTT, doing both or neither are fundamental issues for an access services provider.

The reason is that Industry executives believe the linear business will change, over the next decade, as OTT options grow.

The magnitude and timing of the shift are major unknowns. Also unclear is the business model for being a linear video services provider. And it is clear that Verizon sees less upside than AT&T.

For Verizon, the new wrinkle is mobile-centric content, and the thinking clearly is that there are ways to leverage live events (concerts and sports, especially) specifically in the mobile domain.

Video in the fixed network is a different issue, Verizon executives might argue, because it is anchored by linear video, a product that already has likely passed the peak of its product life cycle, and also because profit margin for linear video lags profits for other products, at least as Verizon experiences the business case.

So what other routes might be taken? Verizon tends to believe that over the top services hold some promise, compared to linear video, even if saving money really is not the issue.

Creation of lower-price linear services now is on the agenda for the linear video business, especially to reach Millennials who never have acquired the habit, or are abandoning the habit of buying linear video.

Ironically, even if “saving money” is the value, many consumers would not be able to save money replacing a linear video subscription with a purpose-built set of alternatives.

At some point, when a consumer watches a fair number of channels, the bundled linear video service, with access from smartphones and tablets on a remote basis, arguably will be a cheaper alternative to buying many individual channels.

But Verizon, AT&T, Comcast and others already see that the key strategy is to leverage end user demand for video to drive high speed access services with some usage component.

In that view, the precise mix of video content options (linear, OTT) matters less than supplying the high speed access customers need to view all that content.

Why "Internet of Everything" Makes So Much Sense

Cisco these days touts the "Internet of everything," and that might not be a bad way to describe what is happening in the world of devices and Internet connections.

Cisco defines the Internet of Everything (IoE) as “bringing together people, process, data, and things to make networked connections more relevant and valuable than ever before-turning information into actions.”

The neatness comes from the fact that the “Internet of everything” definition does not require discriminating between phones, tablets, PCs and all other Internet connected devices.

At least traditionally, the Internet primarily has been a network used by computers and humans, but the way most people encounter the Internet is when using their personal computers, tablets and phones.

And, early on, revenue in the Internet access business has been based on connecting devices people use (phones, PCs, tablets).

The reason the Internet of Things and machine-to-machine applications are terms of art is because the next big wave of growth for access providers is expected to come from connections provided to sensors and devices that communicate mostly with servers, and do not represent people using devices directly.

That matters.

Whole new industries and lines of business are expected to arise as new ways are found to embed sensors in a wide range of settings, using Internet-based communications to inform decision making.

Nevertheless, it sometimes is difficult to clearly delineate “connected device” markets from “smartphone” markets from “machine-to-machine” (M2M) and “Internet of Things” (IoT) markets.

“Connected device” sometimes means non-phone devices such as tablets, but sometimes gets lumped in with M2M sensor apps. Some might consider M2M (industrial sensors) part of the Internet of Things, but others might also include smart watches in the IoT category.

In a broad sense, sensing and actuating functions potentially can occur on any Internet-connected device, whether that is a phone, a watch or an industrial sensor.

So the distinction between devices people use, and sensors that talk to servers, is not always clear cut.

In some cases, the Internet of Things might well build on the “Internet of people.” Generally speaking, the IoT refers to sensors using the Internet, while the IoP might refer to humans using the Internet. But what do we make of a smart watch that relies on a smartphone for much of its processing?

In some other cases, sensor networks might use Wi-Fi or bluetooth data from user phones at a venue to create useful data of the sort touted for IoT apps.

As Google Maps uses Wi-Fi data to improve the accuracy of the navigation features of Google Maps, so too can user device data be analyzed to product the sorts of useful information the IoT promises.

Security line wait times, for example, are predicted by use of Wi-Fi signals at the Austin airport, in real time. Meanwhile, use of the historical data might allow optimization of the queueing process.

The point is that although it is useful to have categories such as IoT and M2M, and to distinguish them from the ways people use phones for Internet access and apps, the actual new apps might represent a mix of categories, including new scenarios where phones are viewed primarily as sensors.

In other words, use of sensor data likely will cross boundaries, extending use of devices by people to create new sensing-based value that might more properly be thought of as IoT. Or, as Cisco, likes to say, the Internet of everything.