U.S. ISP Profit Squueze Now is Likely

The decision on Feb. 26, 2015 by the Federal Communications Commission to preempt state laws prohibiting municipal broadband networks is but one example of growing competition in the U.S. high speed access market that arguably already was getting more competitive, thanks largely to Google Fiber.

Consumers will benefit, at least in the near term, as the actual presence of a third provider in a growing range of local markets both increases speeds and lowers prices.

Consider what Sonic.net is doing. It now is selling gigabit connections, with voice service, for $40 a month, submarining even Google Fiber pricing of $70 a month for gigabit high speed access.

Cumulatively, all the coming new competition, plus declines in mobile high speed access, are going to mean service providers must reduce their operating costs.

From 2010 to 2013, U.S. mobile data pricing (per unit sold) declined by only single digits year over year.

But in the first nine months of 2014, data pricing dropped by 77 percent, according to industry analyst Chetan Sharma.

At the same time, average (mean) mobile data consumption increased to about 2 gigabytes (Gb) a month. Sharma notes it took 20 years for consumption to reach 1 Gb per month usage levels.

The increase to 2 Gb took about a year.

In addition to plunging prices (less revenue per unit sold) and higher usage (more network cost), marketing costs have grown as competition has become more intense.

Overall U.S. operating expense rose 20 percent, year over year. Income was flat while earnings grew three percent.

Like it or not, more competition in Internet access is coming. Profits are going to get squeezed.

Will Customers Pay for Two High Speed Networks--on Different Platforms--to Support Dual Routers?

If you have lemons, make lemonade, an old adage suggests.

For a high speed access provider with access to both cable TV hybrid fiber coax and wholesale fiber-to-home access, that might mean trying to add value to an offer by bundling access to both networks as part of a single high speed access subscription.

It’s unusual, but few service provider anywhere in the world have such access as does StarHub in Singapore.

So Starhub now is testing the notion that having two high speed connections, supplied by different networks, has value for Wi-Fi coverage, and therefore makes the Starhub “two connections” offer distinct in the Singapore high speed access market.

Essentially, StarHub is trying to wring more value out of a legacy HFC access network, now that it also has wholesale access to the fiber-to-home network in Singapore. Bandwidth really isn’t the angle.

It easily can be argued that there is actually little advantage gained  when a StarHub subscriber buys a S$69 per month gigabit access service sourced by the Next Generation Network Broadband Network used by all high speed access providers in Singapore, and then also gets, at no extra charge, a 100 Mbps connection to the StarHub HFC network.

Competitors offer the gigabit connection for S$49 a month.

In truth, few, if any applications actually use much of a gigabit connection, so adding another 100 Mbps might provide little if any value, in terms of the access connection’s bandwidth. And the additional cost will be a barrier.

But StarHub already has built the HFC network, and now it essentially is a stranded asset. So StarHub might as well try and figure out a way to wring some value out of the legacy asset.

In what might otherwise be an obvious case of overkill (over-provisioning or over-investment), StarHub argues the value is multiple Wi-Fi base stations, to improve indoor coverage.

It remains to be seen whether that “advantage” actually resonates with customers. But it is an unusual offer.

To be sure, StarHub sells linear video entertainment, so the HFC network investment is not fully stranded. But the NBNBN also now means StarHub has to offer gigabit services over the Singapore wholesale network, to remain competitive in the high speed access business.

That means the financial return from the HFC network will be driven primarily by sale of voice and linear video services, not a triple play bundle including high speed access. But that’s where the new “dual-network” approach comes in.

Over the long term, it isn’t so clear that it makes sense to maintain the HFC network. In the meantime, StarHub will try to earn a potential S$20 a month in incremental revenue by supplying a “two Wi-Fi routers” approach.

When you have lemons, make lemonade. Then, can you sell enough of it to make the effort worthwhile?

Net Neutrality Rules Will Pass Today

The unknowns are the precise details, and even those won't be available for a few weeks. The rules would not take effect until 30 days after publication. 

Then there will be a short stay of the rules, as lawsuits are filed. Then, in all likelihood, the rules will take effect until the lawsuits are heard and decided. 

How much uncertainty will be created in the U.S. telecommunications business is an issue. 

Despite Robust Mobile Revenue Growth, Axiata Profit Drops 80%

An eight-year robust revenue growth streak has ended abruptly at mobile services supplier Axiata. The issue now is whether the dip is cyclical or structural.

In many key respects, Axiata Group now faces business issues identical to those faced by other mobile service providers, namely robust growth in mobile data revenues, offset by losses of voice and text messaging revenue.

But slower economic growth, foreign exchange issues and investments played a role in Axiata 2014 results as well.

Not even robust mobile data revenue growth of 50 percent was enough to overcome business headwinds faced by Malaysia-based Axiata Group in 2014, which had a full-year 7.9 percent decline in net profit on a 1.9 percent growth in revenue, where the target had been 10 percent.

Axiata has an 84-percent dividend payout ratio, so any dip in revenue has key implications for profits.

Total data revenue grew 31.5 percent year over year.

Slow economic growth, currency issues and heavy capital investment were noted as reasons for the results, which were a reversal after about eight years of strong revenue growth.

Smart was the best performer with revenue growth of 36 percent and  60.5 percent earnings growth. Though voice  revenue grew 19 percent, data grew 135 percent. Performance also was strong at the Robi, Dialog and Idea units, though 44 percent of revenue is earned at Celcom and 35 percent at XL.

source: Axiata

Axiata's Malaysian mobile subsidiary Celcom fell 12 percent and revenue declined 3.5 percent.  

In Indonesia, XL Axiata increased its revenue by 10 percent to 23.6 trillion rupiah ($1.8 billion).

Axiata also recorded a strong performance at its Sri Lanka, Bangladesh and Cambodian subsidiaries, and solid contributions from its affiliates in India (Idea Cellular) and Singapore (M1).

Cablevision Makes "Big Shift:" Now is a Connectivity Company, not a "TV" Company

Cablevision Systems Corp. now says its most important product is Internet connectivity. The corollary is that, at some point, “I would suggest that we'll probably be agnostic about the video and not about the connectivity,” said James Dolan, Cablevision Systems Corp. CEO.

In other words, Cablevision has become more agnostic about linear video and over the top streamed video. Cablevision also is clear that high speed access is the foundation of the coming business.

“Connectivity has surpassed video as the primary product for a company like ours,” said James Dolan, Cablevision Systems Corp. CEO. “The consumer values the connectivity product more than they do the video product at this point.”

That is a “big shift,” said Dolan. If given a choice of linear video or Internet access, consumers “almost overwhelmingly will take the data product.”

And though it remains to be seen whether the current vision is the ultimate vision, Cablevision does not currently seen its Freewheel Wi-Fi- based phone service as a competitor to mobile service.

“We're not chasing the cellular markets to be a mobile phone provider,” said Dolan. “That's just not what the strategy for this product is about.”

And we should assume other products based on Wi-Fi access--inside and outside the home--are coming.

“There are products and services that will go along with that strategic position,” said Dolan. “The first of which you've just seen, which is Freewheel, but there will be others.”

“Wi-Fi is a critical part of our product strategy and one of our most important strategic assets,” said Dolan.

There are several important insights here. First, Cablevision sees itself as a connectivity company, not a video services provider.

Also, Wi-Fi is seen as a key building block for new services, beginning with a new Wi-Fi-based phone service, but likely to be followed with a mobile video consumption service.

Finally, Cablevision finally has launched a service it first envisioned in the late 1980s, namely an untethered communications service distinct from what we now know as “mobile phone service.”

An Illustration of Scale Benefits in Mobile

   U.S. Mobile Capex, Compared to Revenue source: TMF Associates

​Historically, North American mobile operators have invested twice as much capital per subscription as their global counterparts, according to analysts at ABI Research.

For 2015, ABI Research forecasts North America capital investment per subscription to be US$63. In comparison, Western European operators will invest US$34.

On the other hand, an argument can be made that U.S. mobile capex actually has been declining, on a per-account basis, for quite some time.

“In absolute terms, network investment has fallen quite sharply since 2004, and only rebounded partially in 2010 and 2011,” according to TMF Associates. “As a percentage of revenues, capex has fallen even further, and has roughly halved in the last decade.”

North American mobile operators invest 39 percent of capital on radio access networks. About 26 percent is targeted at in-building access.

ABI Research predicts North American and global mobile capital investment per subscription will decline, however, after a peak at US$224 billion in 2017.

The perhaps-key implication is that capital investment, as a percentage of revenue, is dropping, likely representing better efficiency because of scale.

      

Big Data is at Heart of Internet of Things

It is likely that big data, one of the big “hype” concepts just a few years ago, will find practical application as an integral part of developing Internet of Things and machine-to-machine applications that essentially gather data and then analyze it for application in real time, or near real time, to control the operation of devices, people and systems.

“IoT isn’t just about gathering data; it’s about using it to make better decisions — that’s the value of IoT, Verizon argues. “Regardless of whether the output is manual or highly automated, analysis of the data must be integrated into business processes. If the data is not actionable, by you or a third party, it’s not IoT.”