Where is the "Next Big Thing" for Telecom Service Providers?

Sometimes the “next big thing” does not prove to be as big as expected. It might not be too early to say that consumer wearables--though someday that might change--are a product category to rival smartphones or TVs. So far, expectations are lagging forecasts. That is not unusual.

Tablets once were thought to be the next big thing in personal computing. Significant, yes, but not a new category big enough to replicate the market opportunity of PCs, phones or TVs. In fact, consumer interest in wearables has been in decline since 2015. Demand for smart watches, perhaps the biggest category within the wearables market, has plummeted.

That does not mean wearables will not, in the future, make a comeback. But it can take decades for that to happen. What we now call “cloud computing” was a hopeful “next big thing” in the mid-1990s, when application service providers made a big splash. It was not to be. The point is that even big innovations often take a while--a decade or more--to reach commercial success.

Some will not that the search for the next big thing in consumer electronics continues, with huge implications for that industry.  So far, nothing has reached the magnitude of the smartphone.

For suppliers, including consumer electronics firms and internet access providers, that search is vital. Big new markets are needed to replace a smartphone market that is fast maturing, as well as declining voice, messaging and other “access network” products.

Internet of Things is widely expected to provide some serious chance of creating one or more "next big thing" markets. But history suggests we might be further from that happening than many hope.

source: Argus Insights

70% of TV Channels Lost Share in 2016

Cord cutting and cord avoidance are part of the reason most TV channels now see audience losses. What else would you expect in a market where choices keep growing, but discretionary time does not? The point is, even if one "solves" the problem of fewer people subscribing to video services, that does not mean the "market share" problem (smaller audiences) gets solved.

Most economic or industrial “problems” are difficult to solve. There typically are opposed stakeholders, often multiple drivers of industry dynamics and underlying performance trend.

The problem of “jobs moving from high-wage to low-wage areas;” coal industry dynamics or viewership of linear TV channels provide examples. One can try and stop the movement of jobs, but then it becomes logical to eliminate the jobs altogether, by automating or changing business practices.

One might blame coal industry declines on government policy (true enough, in many cases), but also note that the better economics of natural gas (it is cheaper than coal for electrical generation) would cause distress in the coal industry in any case.

So too in the television network area, one might argue that changing consumer demand (cord cutting) is leading to less viewership of ESPN and other channels. But it also is true that in a market with vastly more choices, and a fixed number of buyers and discretionary time, that viewing time on any legacy channel likely has to fall.

In other words, people have a relatively-fixed amount of time for leisure, and less time than that for watching TV. If choices grow from dozens to hundreds, it stands to reason that some time has to shift from the dozens of legacy channels to the new channels. Such audience fragmentation has been going on since cable TV channels first appeared, taking audience share from the “big three” broadcast TV networks.

When there are hundreds of channels, plus new services (Netflix, Amazon Prime, DirecTV Now, Sling) that shift additional video viewing time away from “channels,” audience fragmentation seems an inevitable consequence. Dividing market share in any market is different when there are just three providers, dozens of providers, hundreds of providers or virtually thousands of choices (each on-demand title represents a chance to “spend time” that competes with watching a TV channel for the equivalent amount of time).

That is why most--if not all--legacy channels will continue to be under pressure. It is not just a “sports” or “ESPN” problem.

source: CNBC

Will AT&T Scale Lead to Innovation, Competition?

In the U.S. market, AT&T argues that its acquisition of Time Warner will lead to more innovation and competition, an argument some will find hard to believe, even though some AT&T customers might already be seeing the advantages (zero rating of video, additional channels added to existing packages at no incremental charge, including Sunday Ticket, in some cases), more bundle discounts and DirecTV Now.

One argument is that AT&T needs both Time Warner and DirecTV to compete with industry giant Comcast, as all providers in the access, voice and mobile markets find they must create new sources of revenue.

An early and logical path has been for telcos and cable to attack each other’s markets, growing revenue by gaining share in new markets. Cable’s path is easier, as it is attacking the far-larger telecom markets. Telcos have the smaller video market in which to take share.  

Roughly speaking, annual core telecommunications revenue is something on the order of $330 billion each year. Linear video is about $100 billion a year. Rough math: 30 percent of $330 billion is $99 billion; 30 percent of $100 billion is $30 billion. If telcos and cable companies trade market share at equal rates, cable gains an order of magnitude more revenue than do telcos.

In the important internet access business, cable already dominates. Since about 2007, U.S. telcos have steadily lost market share in internet access services, with cable now getting all the net new additions.

So perspective is a key issue. Many continue to see AT&T as a “giant monopolist” in need of restraint. Others might argue that all of AT&T’s core markets are shrinking, and that revenue growth has come primarily because of acquisitions outside its core business. All of AT&T’s legacy businesses are mature, and under attack from new competitors.

Comcast and cable TV, on the other hand, also facing shrinkage in its core business, have been able to gain dominance in internet access, substantial share in voice, growing share in business services, and soon will enter the mobile business as well. The new markets Comcast and others are entering are far larger than the markets where they face competition from the likes of AT&T.

Some might argue AT&T should be prevented from acquiring Time Warner simply because AT&T “gets bigger.” But scale arguably is required, to compete against Comcast and Charter Communications in video markets.

Also, a simple way to describe the fundamental cable strategy is that “you have to own at least some of the content you deliver over your networks.” If AT&T follows suit, it just makes sense: it is following the cable playbook. Yes, that means more scale. But scale is required, many would note

“Winner take all” is a key feature of application markets. “A few take all” is a better description of access markets. In such markets it arguably is the case that only big company to compete. In fact, looking at what Apple did to mobile device markets, it can be argued that only a big scale player can disrupt existing markets. That might be a valid statement even if new competitors can enter markets relatively easily. It isn’t the ease of entry that matters, but the ability to gain traction and scale.

Facebook and Google provide the best examples of “winner take all” dynamics in social media and search. And virtually all telecommunications markets (mobile or fixed) feature just a few providers, with one or two providers typically accounting for half to 60 percent market share.

History, logic and theory also would suggest that facilities-based competition requires so much capital, and strands so much investment, that business models become unsustainable rather quickly, when there are two or more facilities-based competitors.  In other words, telecom facilities tend to be oligopolistic in nature.

The issue for policymakers is how to structure conditions for maximum feasible investment and maximum feasible competition, understanding that those are, to a large extent, contradictory goals.  

Nor does the number of leading providers in a market necessarily lead to robust competition, either. Regulators in Japan, South Korea, Singapore and Myanmar, for example, want to increase competition in their markets by one more provider. In those markets, duopolies or markets lead by three providers are not deemed to be providing enough innovation.

In the U.S. fixed networks market, competition between cable TV and telco providers has been surprisingly robust, perhaps intensified by cultural and industrial issues. The cable TV industry always has seen itself as a small entity competing against a much-larger “telco” ecosystem with vastly-more resources.

So multiple providers might best be described as “necessary for robust competition, but not sufficient.”

source: Precursor

More Evidence that Spectrum Options Remain Top of Mind

The ongoing auction of 600-MHz spectrum in the United States still looks to generating bids that are below seller and government expectations. After accounting for the costs of the auction, TV broadcasters moving off sold spectrum and funds to allow repacking of smaller spectrum blocks into larger bands, the auction has to reach $88.4 billion.

Stage one of the forward auction generated total bids of $23 billion after the 27th round of bidding.

In stage two of the auction, the Federal Communications Commission reduced amount of spectrum expected to “clear” (sell) from 126 MHz to 114 MHz.

The FCC also reduced the “option clearing spectrum size” to 90 MHz and $54.6 billion. But the stage two auction ended after bids of just $21.5 billion were placed.

In stage three, a target of $40.3 billion has been set, for 108 MHz of spectrum. Just $19.7 billion was bid.

You see the trend: buyers simply do not value the spectrum as highly as the sellers, suggesting bidders are well aware there are other capacity options, ranging from coming 5G spectrum in millimeter bands, smaller cell architectures, use of unlicensed spectrum, shared spectrum and, for some new contestants, acquisitions.

Recent major spectrum auctions seem to be indicating a change in spectrum valuation. The big spectrum auction in India raised about 11 percent of the amount the government expected. To be sure, spectrum remains a relatively scarce commodity, whether licensed or unlicensed.

But as 5G draws near, those assumptions will be challenged. Traditionally, mobile operators, for example, have had two primary tools for increasing the effective amount of capacity: acquire and deploy more spectrum, or reduce the size of cells.

Both smaller cells and new spectrum (vast amounts of spectrum, in fact) will be key features of 5G networks. But there will be new tools, including, in some markets, shared spectrum. Better radio technologies and better bonding of licensed and Wi-Fi spectrum also are coming.

In some markets, contestant consolidation (buying whole firms, with their spectrum licenses) also is becoming a viable alternative to buying new spectrum. That is the case in India now, and likely will happen in the U.S. market within a relatively short amount of time, as both Sprint and T-Mobile US are likely to be acquired, while Dish Network also has a trove of spectrum to be put to use.

Ultimately, the biggest bidders are likely to include smaller telcos and cable TV companies able to buy spectrum reserved for firms with little spectrum in the lower bands.

The larger point is that spectrum prices are under pressure because potential bidders know vast new amounts of spectrum are going to be made available, plus small cell architectures and use of shared and unlicensed spectrum resources.

Half the U.S. Internet Consumers Choose Not to Buy Service Faster than 25 Mbps

It is easy to misread government reports. A new study on internet access speeds by the U.S. Federal Communications Commission has be interpreted by some to show that “half the country can’t get speeds of 25 Mbps.” What the study actually reports is that “half the country chooses not to buy fixed network service at speeds above 25 Mbps.”

In the preamble, the FCC says “For purposes of this report, Internet access connections are those in service.” That means “connections purchased by consumers,” not “service that is available for purchase.”

A separate report by the National Telecommunications and Information Administration (NTIA) in 2013 showed that in only 19 percent of locations was there no provider selling service at 25 Mbps or more. If correct, it cannot the case that “half” of U.S. locations cannot buy service at that 25 Mbps level. In fact, 80 percent of locations can buy 25 Mbps service.

source: NTIA

The report also includes both mobile and fixed connections. Few mobile services routinely offer service at faster than 25 Mbps, and mobile connections are the dominant internet access technology (253 million connections) covered by the report, with fixed connections at about 102 million. In other words, mobile now represents 71 percent of internet access connections.

In addition, some 84 percent of fixed network connections operating at 25 Mbps, and purchased by consumers, are provided by cable operators.

If the Future of Video is Mobile," Much Will Have to Change

“The future of video is mobile And the future of mobile is video,” said Tom Keathley, AT&T SVP, releasing news about AT&T’s 5G tests in Austin, Texas. That assertion might  be true at multiple levels, beyond the observation that video already drives capacity demand on mobile networks.

In fact, it always has been clear that on-demand video would “break” the economics of a traditional video service, when the mobile network charges for data usage. The reason is simply that traditional video services do not charge for use of networks (the cost of the network is part of the content subscription). In other words, media business models always were based on zero rating.  

So long as mobile networks charge both for content and access, consumption of video will face hurdles, and consumption of next-generation versions of linear video services will face impossibly-high barriers. By about 2022, video will drive 75 percent of all mobile usage, some predict.  

At least in the medium term, video is the biggest new revenue source in the mobile business. Already, peak hour data demand is driven by entertainment video, which represents about half of all demand at peak hours of use.

Ultimately, mobile likely will change the way subscription video applications are regulated when carried on mobile networks. The analogies are mobile voice and messaging, where consumers pay for use of those features, but not the underlying bandwidth to support the usage.

Up to this point, that has not been the way subscription video services are charged, on fixed or mobile networks. Until now, consumers paid both for consumed data and the content subscription.

That actually is a barrier to widespread adoption of mobile subscription video, as significantly higher data charges would be an inevitable result.

The T-Mobile US “Binge On” program, which allows customers to view nearly all video without incurring data usage charges, was the first effort to encourage a new model by exempting usage charges for bandwidth-intensive video apps.

AT&T’s DirecTV Now is the next-generation replacement for linear DirecTV. But DirecTV has a different business model from over the top apps, in one key sense. DirecTV, and cable TV or telco TV, is a managed service, bundling an access network for delivery and quality of service mechanisms, with the actual “product” being the content, not the use of the network.

Traditionally, satellite TV and cable TV have been regulated differently than telco access networks, on a modified broadcast TV basis. Telco access networks have been regulated as common carrier utilities, although for most of its existence, internet access was not regulated as a common carrier service (that changed under the Obama administration, but is subject to change).

As virtually all media types now can be delivered over an IP infrastructure (public or private), the big problem to be addressed is how to modernize and rationalize regulation of all the various apps and services, which have ranged from unregulated (print media) to somewhat regulated (broadcast TV and radio; cable TV apps and access) to common carrier (telcos and cable, to a certain extent).

When every media type can use one physical infrastructure, different sets of regulatory frameworks--treating different providers in different ways; or the same apps in different ways based on which physical infrastructure is used--will make little sense. Zero rating is allowed for newspapers and magazines, broadcast TV and radio, cable TV and other linear distribution services, but not for IP network delivery, even when it is the same content.

Altice Closes Wi-Fi-Only Phone Service

As promised, Altice, owner of the former Cablevision Systems Corp., has shut down Cablevision’s “Wi-Fi-only” Freewheel service, in part because new owner Altice sees little value in the service, and partly because neither did consumers.

It might be reasonable to draw a few conclusions from the service’s failure to gain traction. Simply, the value proposition was not high enough to convince most consumers to switch from their existing mobile service. Compared to “standard” mobile service that has “switch to Wi-Fi when available,” “nothing but Wi-Fi access” was apparently deemed too big a hassle, compared to the standard mobile experience.

Those limitations were not offset by the low retail price.

Such approaches actually are not new.

Service providers have experimented with services part way between full mobility and tethered phone service in the past, including the “Handyphone” effort in Japan.

In fact, the new spectrum made available as “Personal Communications Service” bands originally were conceived as providing the platform for services that might lie somewhere between cordless home phone service and full mobility service. That spectrum (1850 MHz to 1990 MHz) now is used exclusively for traditional mobile service.

Several decades ago, when mobile service was too expensive for mass markets, service providers thought about, and tested, services in the middle, able to work outside the home, at walking speeds, but not in fast-moving cars. That was the thinking behind PCS, a service differentiated from fully-mobile service.

But the market changed. Long a high-priced service used by business customers, retail prices for mobile service dropped dramatically after the PCS spectrum was made available between 1994 and 1995. That seems to have been the inflection point for mobile adoption in the United States.

Basically, full mobile service became affordable enough that it killed the potential market niche for a service halfway between in-home cordless and wide area mobility.

source: Bloomberg

source: Technology Review

source: Brad Larson

The point is that Freewheel failed because consumers already find the alternative--standard mobile service--the preferred product, even at a higher recurring cost.