37% of Comcast Customers Buy 3 or 4 Products

One set of numbers from the Comcast third quarter 2017 results is instructive: Comcast details the number of customers taking single, dual-product and three-product or four-product packages.

About 30 percent of consumer customers buy just one product, a third buy two products, while 37 percent buy purchase or four products.

That matters for revenue, as a buyer of multiple products produces more revenue than an account purchasing just a single product, all other things being equal (such as the unit price of each type of product).

More significantly, purchases of bundles determine the viability of the business case itself.

Stranded assets are big problems in highly-competitive fixed network markets. Assume a typical local market where the local telco and the local cable operator are equally skilled, but where cable has an advantage in the internet access and sometimes video product segments.

Assume a typical market share structure has the cable operator getting about 60 percent market share, while the telco gets about 40 percent.

That means the telco has no revenue generated from 60 percent of its passings, while cable gets no revenue from 40 percent of consumer locations passed.

But multiple service purchases effectively boost revenue as much as having more accounts in service. In other words, selling more things to fewer customers can produce as much revenue as selling one product to nearly every location.

And that is why take rates for multiple-product bundles matter so much: business models that would fail in a single-product environment  can work, even at significantly-lower rates of customer adoption.  

Comcast Account Segments (accounts in thousands)
Category	3Q 2016	3Q 2017	Net Adds 3Q 2016	Net Adds 3Q 2017
Residential Video Customers	21,420	21,341	19	(134)
Business Services Video Customers	1,007	1,049	13	9
Total Video Customers	22,428	22,390	32	(125)
Total High-Speed Internet Customers	24,316	25,519	330	214
Residential Voice Customers	10,527	10,351	(24)	(119)
Business Services Voice Customers	1,116	1,214	26	25
Total Voice Customers	11,643	11,565	2	(94)
Total Security and Automation Customers	815	1,079	78	51
Residential Customer Relationships	26,312	26,957	175	83
Business Services Customer Relationships	2,006	2,146	43	31
Total Customer Relationships	28,318	29,104	217	115
Single Product Residential Customers	7,722	8,055	51	125
Double Product Residential Customers	8,682	8,983	97	38
Triple and Quad Product Residential Customers	9,908	9,919	26	(79)
source: Comcast

Advanced Technology is Indistinguishable From Magic

“Any sufficiently advanced technology is indistinguishable from magic,” Arthur Clarke famously said. Just as certainly, even an advanced technology that is a general purpose technology (like electricity, computing, internal combustion engine), once ubiquitous, recedes into the background and is not commonly referred to as “advanced technology” any longer.

That happened with electricity, computing, the internal combustion engine, steam power, railroads, automobiles, the domestication of plants and animals, the wheel, writing, printing and mass production, none of which is generally considered to be advanced technology in the same sense as artificial technology now is viewed.

One normally hears artificial intelligence mentioned as one of three forms of machine learning, with deep learning and neural networks often said to be more-intense forms of AI, where machines learn on their own, without direct and specific programming by humans, or where computers are able to recognize new patterns on an unsupervised basis, creating new rules based on those insights.

But early forms of AI already surround us. Apple’s Siri, Amazon’s Alexa, Amazon’s shopping experience, Netflix video and Google’s Nest thermostat system all are based on use of AI. So are algorithmic trading, robo financial advisors, Google Maps, Google search, ridesharing services such as Uber and Lyft, Gmail, mobile check deposit, Facebook, Pinterest, Instagram and Snapchat, for example.

Videogames, credit card fraud protection, online customer support and personalized content recommendations likewise are powered by AI. By 2025, financial asset trading, image recognition and health applications are likely to be among the biggest users of AI, Tractica argues.

source: Tractica

The point is that the business function of artificial intelligence and machine learning is to glean insight from massive amounts of data human beings cannot analyze quickly enough, and discover relationships in all that apparently random data, and allow application of such insights to organizational and business processes.

With regard to mobile communications, the most-significant data store probably is “current location,” even if that data is rarely used in a direct sense by mobile operators except as required to “connect to the best radio at the moment.”

As always, privacy issues are barriers to using such location information in a more-useful way, for generating insight about future behavior. And location data, by itself, is not as useful as location data combined with detail from many other data stores that inform the analysis engines about past behavior.

In that regard, it is virtually impossible to separate formerly-separate trends, including artificial intelligence, big data, and the Internet of Things (IoT) and mobility itself. Big data requires AI to create new insights, while IoT puts into place the sensors that will generate granular new data, while mobile networks will be key to connecting many of those new sensors.

Will Internet Access Prices Double?

Some believe internet access prices are going to climb substantially--possibly doubling--over the next decade, in some markets, even if the longer-term trend has been for prices to fall.

Since 1997, U.S. internet access prices have fallen, but there have been other changes. Mobile plans have tended to be priced based on buckets of usage, so as usage has climbed, consumers also have tended to buy bigger usage plans, which cost more. Fixed internet access has been priced on speed, so as consumers have shifted to faster-speed plans, their spending has climbed.

That argument, in the U.S. market, is that the leading suppliers (cable TV companies) will have to raise internet access prices to replace lost video revenues.

But “supplier need” always has to be balanced against  “end user demand” and market dynamics. No amount of supplier need has lead to price increases for voice services or text messaging, for example.

Perhaps video entertainment service trends will prove instructive, as linear video subscription prices have moved only in one direction--higher--for many decades. On the other hand, the linear video business now is shrinking, and lower-cost substitutes (Netflix, Amazon Prime, Hulu) are gaining share.

That suggests both lower linear video revenues longer term, even if some customers might be willing to pay higher prices.

That might happen in the internet access space as well. Some customers might be willing to pay much higher prices for “higher perceived value” access services. But most customers might find sufficient value for many lower-priced packages.

Greater competition from third parties and mobile, orders of magnitude more spectrum, lower-cost networks and even greater use of Wi-Fi are likely to combine to limit pricing power by internet service providers, no matter how much they might want to boost prices.

And if capacity “abundance” replaces capacity “scarcity,” as seems entirely likely in the U.S. market, suppliers will have a hard time raising prices.

User perceptions about the level of internet access prices (headed up, largely flat or declining) might or might not match actual pricing levels. That is especially true when pricing is relative to speed or consumption, and the consumption curve changes.

Among the complications: changing product attributes; inflation; actual versus posted prices; volume discounts; changes in supply and demand. It also matters “how” prices are measured.

According to the International Telecommunications Union, fixed network broadband prices as a percentage of gross national income actually have dropped substantially since at least 2008.

Buyers of business internet access for longer periods of time will attest that prices have done precisely that, even ignoring the vast increases in connection speed (the traditional pattern is that faster services, or services with greater usage allowances, cost more).

  Fixed Broadband Prices as a Percent of Gross National Income

source: ITU

Some other more recent forecasts suggest the price declines will not abate.

Complicating matters further is the huge role played by Wi-Fi. Bell Labs Consulting estimates that, by 2020, Wi-Fi will have the potential to satisfy 66 percent of all growth in demand globally. And that is with consumption increases from 2014 levels of 30 to 98 times.

source: Nokia Bell Labs

As with computing products, though, the “product” improves with time (using access speed as one measure of product quality). So even if posted retail prices remain relatively consistent, price per megabit per second has dropped.

Also, demand changes over time, as typical users consume more data the longer they use the internet, and internet access services.

On the supply side, each new generation of networks (mobile and fixed) tends to supply more bandwidth at lower prices per delivered bit.

Also, posted retail prices do not actually tell the story about pricing. What matters are the plans most people actually buy, and the level of discounts offered. Another issue is the “effective price,” since the cost to consumer a fixed amount of resources might, or might not, be the same as the amount any user actually winds up consuming.

In other words, retail prices and actual prices paid might be different. Discounts for family or shared plans might be quite important. And “effective” prices are not the same as “nominal prices.”

A given plan might offer X gigabytes of usage for $40. But if a user only actually uses a tenth of the allowance, the effective price per gigabyte is actually $40/.10*X.

source: Analysys Mason

source: Bell Labs

Other big potential changes could have an impact, as well. Video entertainment consumption is shifting to mobile screens, which might further alter spending patterns. And in the 5G era, for the first time, mobile internet access might become a full substitute for fixed access.

There also are many ways suppliers boost revenue, while keeping posted retail prices lower. Airlines advertise ticket prices that do not include taxes and other amenities, such as baggage check fees, food and beverage, Wi-Fi access, seat selection and other services that lead to higher revenues than the retail base price might suggest.

Likewise, fixed internet service providers often advertise one price for access, but without showing taxes and fees, rental of in-home equipment (modems) or additional charges that can add 20 percent or more to the end user total cost.

On the other hand, perhaps few customers actually pay the full retail price for internet access, as they buy discounted bundles of service.

Still, a reasonable person, looking at trends in the consumer internet access market, would likely agree that typical prices could be headed up, at least in part because consumers have been buying faster tiers of service that cost more. That is arguably true in both mobile and fixed segments of the business.

Also, spending less on some products (linear video, voice, messaging) does free up incremental buying power for increases in spending on alternative products. That has been true for internet access and mobile spending, which in part have grown household spend on communications services, but also have been paid for by reductions in fixed network voice spending.

In the U.S. market, “flattish growth or in some cases falling fixed broadband subscriptions and changes in consumer perception in what they want from a bundle will lead to fixed broadband revenue expected to reach $59.9 billion at 1.5 percent compound annual growth rates through 2021, PwC predicts. “Conversely mobile internet revenues will increase by a CAGR of 8.9 percent to US$129.8 billion as LTE subscriptions rise in parallel with demand for OTT streaming services and mobile data consumption continues its rapid increase.”

source: www.pwc.com

Such revenue increases have been the rule for the past five years.

source: PwC

And the growth of mobility revenues might be key to the full story. Mobile subscriptions are sold to persons, not places. If the average home has 2.5 people, that means nearly 2.5 mobile subscriptions per home. So any increase in mobile usage and pricing has a multiplier effect, compared to home access, where only one account is necessary.

According to PwC and Ovum, mobile will represent most of the revenue growth, not fixed network access.

"Up the Stack" Strategy Has Changed Since 2003

Lots has changed in the telecom business over the last decade or two, among them the logical growth opportunities for service providers. In 2003, a reasonable argument could have been made that telecom firms should move into the information technology  (computing) ecosystem. That, in fact, was a strategy some had attempted since the 1980s, with very mixed success.

In 2017, the more common argument is that tier-one service providers should move into video entertainment and internet of things services (connectivity as a minimum, applications and platforms where possible).

These days, executives are more often to consider extension into adjacencies “up the stack,” such as in some verticals where application or platform roles are possible. More often, horizontal acquisitions will be the obvious moves.  

“A consensus is emerging that operators should focus on growth that supports their core connectivity  business, and that their explorations of new areas (if any) should be limited to a small number of opportunities,” Analysys Mason says.

Gone is any serious interest in core computing, even if efforts to enter some parts of the cloud computing business--in the form of ownership of data centers--has been a focus.

For the most part, telcos think others have occupied key segments of the cloud computing ecosystem, including general-purpose cloud computing (Amazon Web Services, Microsoft, Google, others); data centers (most often owned by third parties, not telcos) and consumer and enterprise applications.

source: Analysys Mason

U.S.Federal Expectations for Hybrid Cloud are in Line With Global Expectations

A new survey of U.S. federal government information technology executives find most inclined to favor a hybrid cloud strategy for their computing requirements.

Federal IT managers say their ideal mix includes 39 percent physical servers and 61 percent cloud. Some 70 percent of 150 respondents  believe that in 10 years, the majority of federal agencies will rely on hybrid cloud environments for core applications, says MeriTalk, the firm that conducted the survey on behalf of Fortinet.

That probably is in line with what IT executives globally expect. According to IDC, by 2021, about 40 percent of computing will be done using premises data centers, with about 60 percent done in the cloud.

source: MeriTalk

source: IDC

Service Providers Seem to See Little Growth in Connectivity Services

Innovation in the access provider business that is significant enough to move the revenue needle never is easy. For the largest tier-one service providers, any single initiative--to have revenue impact--has to produce US$1 billion or more, ideally, and do so quickly.

The world's 25 biggest telecom companies  generated $1.2 trillion in revenues in 2016 and $88 billion in profits. For any single firm generating revenue of perhaps $100 billion annually, even an increase of $1 billion to several billion hardly  has any impact on overall results.

Also, few opportunities will produce that magnitude of incremental revenue, and few will do so quickly enough to boost the top and bottom lines fast enough.

Smaller companies have a different problem: they cannot afford to invest--at relevant scale--to take advantage of many opportunities elsewhere in the ecosystem, even if relatively smaller new revenue sources could have impact.  

“A consensus is emerging that operators should focus on growth that supports their core connectivity  business, and that their explorations of new areas (if any) should be limited to a small number of opportunities,” Analysys Mason says.

source: Analysys Mason

source: Analysys Mason

The problem, as outlined by Analysys Mason, is that of the four options for growth, half are largely unrealistic. Growth by subscriber or average revenue per user growth, or even internet of things connections is going to be difficult.

In many markets, subscriber growth already is impossible (except for taking market share). In many markets, ARPU is falling. And it is not hard to forecast that most of the upside from internet of things, as with all other communications-related opportunities, will accrue to application, platform or device suppliers.