LIke it or Not, Oligopoly Often is the Only Possible Market Structure

Once upon a time, fixed network telecommunications was thought to be a “natural monopoly,” akin to roads, bridges, sewer services, water and electrical services.

In many markets, that clearly is not true. There is at least some room for facilities-based competition, though the number of viable contestants will be limited.

So fixed and mobile telecommunications are best thought of as oligopolistic, where only a few leading suppliers actually can exist in a market.

There are key implications. It likely never will be possible for more than a few facilities-based competitors to survive in any market.

That naturally will lead to thinking about regulatory policies based on robust wholesale obligations. The downside: robust wholesale tends to depress both investment by the existing carrier, and market entry by new carriers.

So the issue is not monopoly versus widespread market entry, but between monopoly and the best-possible (sustainable) level of competition among a limited number of contestants. That always will be a judgment call.

But that also poses issues for telecom regulators. If the regulated markets will, under the best of circumstances, only support a few suppliers, where is the boundary between oligopoly conditions where there is not enough competition, and oligopoly under which there is reasonable competition?

“High market concentration levels in a given market may raise some concern that the market is not competitive,” the Federal Communications Commision says. “However, an analysis of other factors, such as prices, non-price rivalry, and entry conditions, may find that a market with high concentration levels is competitive.”

In other words, says the FCC, even high levels of concentration do not necessarily mean a market is uncompetitive. Such markets might, in fact, be substantially competitive, even when other measures say they are not competitive.

We might not like the situation, but in some industries--including telecommunications--oligopoly is the pattern. There always are smaller niches within the market, but typically the amount of activity is a small fraction of total market revenues.

The U.S. mobile market is no exception. The four U.S. nationwide mobile service providers accounted for approximately 98 percent of the nation’s mobile wireless service revenue in 2014, up from approximately 91 percent in 2012, and the service revenues of AT&T and Verizon Wireless together accounted for approximately 71 percent of total service revenue in 2014, according to the Federal Communications Commission.

Of the four nationwide facilities-based service providers, AT&T and Verizon Wireless continued to maintain the largest market shares throughout 2014.

Sprint stayed relatively flat, and T-Mobile had the largest quarterly increases in market share to end 2014, as measured by revenue.

The same pattern continued in the first half of 2015, with AT&T and Verizon Wireless continuing to account for approximately 71 percent of total service revenues.

While T-Mobile continues to narrow the gap against Sprint, as of mid-2015, Sprint remained the third largest service provider in the mobile wireless marketplace in terms of service revenues.

http://transition.fcc.gov/Daily_Releases/Daily_Business/2015/db1223/DA-15-1487A1.pdf

The practical issue, then, often becomes the actual number of sustainable providers in any market. In the mobile arena, that tends to be the difference between three and four.

Why Amazon Cares about Drone Delivery

There is a very simple reason why Amazon is interested in commercial drone delivery services. For parcels weighing less than five pounds, the thinking goes, Amazon could potentially cut delivery costs up to an order of magnitude, compared to using UPS Ground, or “only” about nine times less than same-day shipping, or five times less than U.S. Postal Service one-day shipping.

Such changes also illustrate channel conflict. By internalizing delivery cost, and using a new platform. Amazon slices its distribution costs dramatically. Of course, that means less business for one of its traditional delivery partners.

Channel conflict dangers never fully disappear, in any business.

source: Business Insider

How Much Advantage Does Quad Play Provide?

Just how much advantage--beyond the free cash flow--AT&T will derive from DirecTV remains unclear. In some large part, one’s optimism or pessimism is driven by one’s beliefs about the coming power of quadruple play offers.

Many are skeptical of consumer demand for bundles of fixed services and mobility, while others, including cable TV operators, believe quad plays will drive both customer acquisition and loyalty.

To be sure the actual benefit of triple play offers has been driven by consumer discounts for buying the bundle, and not necessarily some new service or app potential based on the buying of voice, video and Internet access.

The issue for AT&T might be the extent to which that also extends to the quad play, while mobile services are added to fixed network services.

Count Walter Piecyk of BTIG Research among those who remain skeptical about the benefits AT&T can wring out of DirecTV. The upside?

DirecTV has 15 million customers who don't use AT&T for mobile services and three million DirecTV customers who have access to U-verse but use another Internet service provider. If AT&T can convert a significant percentage of those customers into AT&T mobile or fixed network Internet access customers, there is upside beyond the ability to take advantage of DirecTV’s free cash flow to support AT&T’s dividend.

The downside? Consumer willingness to switch mobile or fixed ISP accounts for relatively modest bundle discounts might be limited, especially when the level of promotions for mobile switchers is presently so high, and churn levels for AT&T and Verizon so low.                                                                                                                             

The analysis all comes down to the expected value of bundling now possible.

AT&T has argued the DirecTV buy would help reduce churn, overall. But Piecyk expects AT&T postpaid account losses to widen from 1.4 million in 2015 to 1.6 million 2016 and further to 1.7 million in 2017, in large part on account of fierce promotional activity by T-Mobile US.

On the other hand, many would argue that DirecTV will be a useful asset as AT&T launches a streaming TV service of its own, soon.

It is fair to say the divergence of opinion is largely centered in the legacy telco part of the market, not the cable TV segment. Where some believe telcos will not get many benefits from quad play, most believe cable TV operators will win.

For some of us, that implies the quad play does have strategic value, even if, as always, the attackers in the market benefit disproportionately.

Incumbents arguably do benefit from enhanced retention (lower churn) and, in AT&T’s case, some incremental ability to cross sell.

The former will be hard to quantify; the latter easier to demonstrate. One way or the other, we shall know, in a rather few years, whether the upselling reality matched the potential.

OTT "Versus" Mobile Operators is a Dead Argument

“OTT versus operators is dead,” argues John Strand, Strand Consult principal. “Partnerships will flourish, if not regulated out of existence” by regulatory bodies.

His argument is quite simple: “the two players need each other, and OTTs know it.” The argument, in broad outlines, is not new. Though some access providers have attempted to create their own over-the-top voice and messaging services, that generally has not worked well.

Instead, one might argue, there is more opportunity for collaboration in all other areas, where access providers might well find it fruitful to partner with OTTs.

You might think of what Internet.org is doing around the world with mobile service providers, partnering to provide “Free Basics,” a suite of Internet apps that can be used by anyone with a smartphone, or in many cases even feature phones, without a mobile data plan.

The idea is to allow people to sample the value of the Internet, on the assumption that many people will discover they want to use the Internet, and hence will buy data plans.

“Music services such as Spotify and Deezer; video services like HBO and Netflix; newspapers and magazines—any and all content that can be bundled with traditional traffic packets that telecom companies sell will be bundled with mobile service for all devices,” Strand argues.

“We expect that the number and type of services that operators bundle with voice, SMS and data will explode,” Strand predicts.

As you might suggest for services built on content, brands will matter. “In the same way that toys, clothing and other consumer products enter partnerships with film companies, more brands and mobile service will come together,” says Strand.

Growing Mobile Substitutiion for Internet Access?

Fixed-line and mobile voice connections are generally perceived by consumers as product substitutes, it is easy enough to argue. Whether that can broadly be the case for mobile and fixed Internet is the bigger question.

The extent to which mobile can be a functional substitute for fixed access is a more complicated issue, in part because of the value-price relationship. Mobile Internet access historically has been slower than fixed access, while the cost to use a mobile gigabyte of data generally is far higher than use of a fixed network gigabyte.

Nevertheless, there are growing instances where fixed and mobile Internet access are more-nearly functionally the same. Such mobile substitution has grown in the U.S. market, for example

For Deutsche Telekom customers, mobile Internet access speed--since 2014--has generally been faster than what is available on the fixed network.

Some usage scenarios already are clear enough. Where the cost of fixed network Internet access is non-economical, mobile will be the only form of access.

Where both mobile and fixed access are available, there are more use cases. With the advent of Long Term Evolution, the number of viable use cases has grown, compared to the situation where 3G is viewed as a potential substitute for fixed access.

Low usage, single-user consumers are a generic class of consumers for which mobile access using LTE could be a viable substitute for fixed access. Single-person households or users who do not watch much online video are examples.

On the other hand, multi-user households that watch significant amounts of video almost never are the best candidates for mobile Internet access substitution.

Someplace in the middle are many use cases where mobile offers might compete effectively with fixed network offers on a price-per-gigabyte basis.

It will is tough, but not impossible. Users will have to manage their own behavior, resisting the temptation to use resource-intensive apps when on the mobile network.

Substitution also will be easier in markets where public Wi-Fi or at-work Wi-Fi is plentiful.

The big question is whether future 5G mobile networks, supporting gigabit access speeds, also will be priced, on a cost-per-gigabyte basis, close enough to fixed prices to make both modes relatively full substitutes.

The other issue is mobile access in markets where fixed network alternatives are unavailable, expensive, slow or all of the above.

The converse also is true: where fixed network services are highly affordable, the value of using a mobile alternative is less compelling.

According to Ofcom, the lowest levels of mobile broadband take-up are in France (15 percent of respondents) and the United States (10 percent).

In France the widespread availability of cheap triple-play bundles of fixed voice, fixed broadband and pay-TV provides an incentive for households to have a fixed broadband service, while in the United States, relatively expensive mobile broadband data charges are likely to be limiting the use of mobile broadband as a substitute for fixed broadband services, Ofcom says.

source: Ofcom

source: Ofcom

Reliance Communications Halts Free Basics, at Least Temporarily, After Government Request

The Telecom Regulatory Authority of India has asked Reliance Communications to stop the Free Basics service, at least temporarily.

"We have asked them (Reliance Communications) to stop it and they have given us a compliance report that it has been stopped," a senior government official said, the Times of India reports.

It always is hard for any firm regulated by a government entity to resist such "requests."

Free Basics, called by many a zero rated approach, allows mobile consumers to use and sample a selection of Internet apps without incurring a data plan charge, or even if they do not have a data plan.

In India and elsewhere, including the United States, regulators, policymakers and policy advocates have been arguing that zero rated apps are a violation of network neutrality principles.

Others argue the practice is a business policy, like offering coupons, discounts and other promotions.

In the United States, the Federal Communications Commission has requested more information from mobile service providers about programs that allow users to listen to streaming music, or watch streaming video, without incurring usage charges on their mobile data plans.

The T-Mobile US "Binge On" program provides an example of that effort. AT&T, meanwhile, offers a sponsored data program where advertisers can sponsor data consumption by consumers, much as toll-free calling works. Verizon, for its part, also is working on a sponsored data program.

Internet Access by Smartphone Now Depresses Fixed Network Internet Access

As wireless substitution has been a major trend in voice communications, it now is measurably an issue for high speed access as well.

About 67 percent of U.S. adults have access to fixed network high speed Internet access, according to the Pew Research Center, down slightly from 70 percent in 2013.

Reliance on mobile Internet access appears to account for the change. More Americans are “smartphone-only” in 2015 than was the case in 2013.

Some 13 percent of adults rely on their smartphone for online access at home, up from the eight percent who did so in 2013.

The increase in “smartphone-only” adoption largely corresponds to the decline in home broadband adoption, according to Pew Research Center.

Smartphone adoption has reached parity with home broadband adoption (68 percent of U.S. adults report they use a smartphone, the same percentage as report using at-home fixed network Internet access.

The bottom line is that 80 percent of U.S. adults have either a smartphone or a home broadband connection, a small change from 2013, when 78 percent had one of these two access means.