What to Expect in OTT Video, Linear Video Markets, According to Product Life Cycle

Television is not what it used to be. Entertainment video and moves now are consumed on many devices, not just TVs; mobile viewing is growing and younger viewers show a preference for streaming, versus linear formats.

Some logical conclusions might be drawn. Entertainment video is a product like any other, with a product life cycle. And linear video unquestionably is a product in the “decline” period of its lifecycle, as “over the top” or streaming services emerge as the replacement product.

source: marketing charts

source: Nielsen

If Netflix and other streaming services are in the growth phase, we would expect to see growing sales volume; scale benefits (lower cost per customer); growing supplier profits and more competitors entering the market.

Conversely, if traditional linear TV is in its decline phase, we would expect to see falling sales volume; lower profits; lower cost per customer and fewer competitors.

There is one important caveat. Real-time streaming services are probably in the earliest phase of the life cycle, but nearing the transition to the “growth” phase of the cycle.  

That implies high costs per customer; still-low sales volume; financial losses for providers and relatively few suppliers are to be expected. In the next phase (“growth”) we would expect to see growing sales volume; scale benefits (lower cost per customer); growing supplier profits and more competitors entering the market.

In the immediate future, linear TV suppliers are going to employ a hybrid strategy: sustain the existing product as long as possible while investing in OTT alternatives.

For firms such as Comcast, with a big stake in legacy TV revenues, one concrete form of that strategy is that it recently boosted internet access speeds by 100 percent, at no additional charge, for Comcast customers who buy at least one other Comcast product (a bundle).

That is intended to shore up linear TV subscription demand, and undoubtedly will do so.

source: marketing-insider

source: comScore

source: comScore

If Vodafone Believes "Mobile Only" is Not a Sustainable Strategy, Why Do Sprint and T-Mobile US Believe Differently?

Vodafone's proposed acquisition of Liberty Global cable TV assets in a number of European markets is the latest step in Vodafone’s shift from a “mobile-only” service provider to an “integrated” provider built on use of both mobile and fixed network assets.

Perhaps that shift should be kept in mind when evaluating the proposed Sprint merger with T-Mobile US, which would create a substantially-larger mobile company in the U.S. market, perhaps eclipsing even AT&T’s mobile share.

If Vodafone is correct, and a “mobile-only” strategy no longer makes sense, can the same mobile-only strategy make sense, longer term, for Sprint and T-Mobile US?

And, if so, will a much-larger new mobile asset be an easier, or harder match, for any future combination of assets? The answer seems clear enough: a much-bigger Sprint-plus-T-Mobile US would be a harder asset for most companies to envision acquiring.

In principle, one might presume that the bigger mobile company could be the acquirer of substantial fixed and other assets. But, as a practical matter, T-Mobile US (assuming that is the surviving brand) probably does not have the capital to acquire a substantial fixed network presence in the U.S. market.

Charter Communications, for example, has a market capitalization in excess of $100 billion. Charter is the second-largest U.S. cable TV operator. Comcast facilities pass about 41 percent of U.S. homes. Charter passes about 33 percent of U.S. homes.

The point is that even if T-Mobile eventually wanted to acquire substantial fixed network assets, it probably could not afford to do so. It would spend in excess of $100 billion to reach just a third of U.S. households.

The merged Sprint plus T-Mobile US might have a valuation of perhaps $140 billion, making it a tougher acquisition target itself.

In other words, if “mobile only” is not a sustainable strategy, the Sprint merger with T-Mobile US only creates a larger company with an unsustainable strategy and also becomes a harder acquisition target for any other large firm in the app, platform or device area.

Ofcom Report Illustrates Key Benefit of Facilities-Based Competition

There always is a trade-off between investment and competition in telecom markets, as the latest Ofcom report on internet access in the United Kingdom illustrates nicely.

“We find that although consumers can receive better performance by switching to a different technology or upgrading to a service with a higher advertised speed, it is unlikely that they will experience a significant improvement by switching from one ADSL or FTTC package to another at the same advertised speed (as services will be provided over the same copper line),” says Ofcom.

source: Ofcom

In other words, policy can emphasize faster deployment (enabled by sharing and therefore lower costs) or more competition, but not both equally, at the same time.

Many would argue that even if retail providers cannot differentiate on speed, network reliability or other facilities-based features (they all use the same network), there still is competition. But some would question how much effective competition there really is.

When every provider has the same underlying network cost base, there is limited ability to cut such costs. Nor is there any ability to boost performance beyond the level “everyone else has” or to add unique network-based features.

To be sure, other ways to differentiate a service (bundling of additional unique services or apps; different retail channels; customer service innovations) are conceivable.

But nothing really can be done about the “speeds and feeds” part of the experience.

It is “unlikely” consumers can “experience a significant improvement” by switching from one ADSL or FTTC package to another at the same advertised speed,” since all the retail providers use the same network.

Only by “switching to a different technology” can “better performance” be obtained. In the case of the U.K. internet access market, that means choosing the cable TV hybrid fiber coax network instead of the BT Openreach net

Simply put, Virgin Media provides the fastest speeds, significantly faster than fiber-to-curb or digital subscriber line networks.

“Virgin Media’s ‘up to’ 200Mbps cable service provided the fastest average download speed of the packages included in the report, both over the whole day (193.6Mbps) and during the peak 8 p.m. to 10 p.m. period (184.3Mbps),” Ofcom says.

source: Ofcom

That is the result of a clear policy choice to use a wholesale business model (one facilities provider used by all retail providers). The upside is that investment costs are reduced; the downside is that every retail ISP can only offer what the wholesale platform supports.

To be sure, in most markets there are few other choices of ubiquitous fixed network platforms such as cable TV. Globally, most facilities-based competition has been provided by mobile networks.

And that is likely to be an issue in the 5G and subsequent eras, as mobile-provided speeds climb to gigabit levels. When that happens, retail pricing and packaging equivalent with fixed network services will be decisive in creating more competition for fixed network services.

What Does it Mean That "Age of Traditional Media is Over"

Many observers would say the age of traditional media now is over, implying changes for business models, revenue sources and strategies. Content creation and content distribution now is conducted by all sorts of “new” participants. Vertical integration now is a main trend and everything changes faster.

Among the many new challenges is figuring out how to price non-linear or real-time streaming content in multi-channel bundles.

DirecTV Now’s packages suggest the price of a single channel in a multi-channel bundle ranges from 58 cents to 60 cents. Compare that to the pricing of other channels, ranging from streamed HBO to Hulu to CBS All Access, which tend to be priced in the $12 to $15 month range, as is Amazon Prime.

source: Drops of Ink

Consumers and suppliers disagree about value, though. Over the past couple of decades, one fact has stood out: consumers generally rate the value of any single TV channel as being worth less than those TV channels believe they are worth.

A recent survey by TiVo confirmed--again--that U.S. consumers generally believe a subscription to a single TV channel “should” cost about $2 a month, with a few channels perhaps having a “fair” price up to $3 a month.

For any product purchased by any consumer, both value and price matter. Up to this point the price of popular streaming products has not been a particular issue, as value (some amount of popular content) has a far-lower recurring cost (perhaps $11 a month compared to a linear package that offers more content, but also can cost $80 a month or more).

Once consumers start buying multiple streaming channels, the total cost obviously grows. For many consumers, a reasonable benchmark might be $40 a month, the pricing level for skinny bundles.

A consumer buying three streaming services at $15 a month spends more than single skinny bundle linear subscription. If, as some predict, every present channel will be offered on a direct streaming basis, the “value versus cost” evaluation is going to change radically.

In that scenario, buying just three services costs more than a skinny bundle would cost. It is not hard to predict that few channels will gain scale, at that pricing level. Nor is it hard to predict that new forms of bundling are going to become more popular.

source: Aidan Wentworth

source: Channel-to

IoT in Agriculture

A study of U.S. farmers and ranchers, conducted by Alpha Brown, suggests that internet of things solutions are currently being used by 250,000 farmers, mainly for livestock and cereals crops (grains).

source: Business Insider

The technology is also used on a smaller scale in other farming operations, such as dairy, vegetable, fruits and greenhouses, Alpha Brown found.

Furthermore, the study reveals that more than half of U.S farmers have an interest in buying such solutions, which reflects a market potential of 1.1 million farmers and market size of $ 4 billion a year.

Business Insider predicts that IoT device installations in the agriculture world will increase from 30 million in 2015 to 75 million in 2020, for a compound annual growth rate of 20 percent.

OnFarm, which makes a connected farm IoT platform, expects the average farm to generate an average of 4.1 million data points per day in 2050, up from 190,000 in 2014.

source: Business Insider

Furthermore, OnFarm ran several studies and discovered that for the average farm, yield rose by 1.75 percent, energy costs dropped $7 to $13 per acre, and water use for irrigation fell by eight percent.

IoT is used in agriculture to control remote instruments and sensors in order to optimize farm work (measuring light, temperature, soil moisture, rainfall, humidity, wind speed, pest infestation, soil content or nutrients, location).

Most U.S. Voice Competition is Facilities Based

A new petition by US Telecom to the Federal Communications Commission for forbearance on mandatory competitor access to unbundled wholesale network elements is not unexpected.

Big facilities owners always argue that particular rules related to mandatory wholesale access create disincentives for them to invest in next-generation facilities.

Would-be competitors virtually always want both discounts and unbundled access, as they cannot afford to build their own facilities.

Among other issues, such rules always involve balancing incentives for investment with enabling more competition. US Telecom argues that almost all competition in the voice market now is facilities-based, which was the hope of backers of the Telecom Act of 1996.

Some 60 percent of U.S. households now use mobile for voice services, while 29 percent use cable TV or other facilities providers for voice.

Of households that do buy fixed network voice, about 55 percent buy from a cable TV or other facilities-based provider.

source: FCC

In business markets, at year-end 2016, telco share of business- and government-grade switched access and interconnected VoiP connections had fallen to 45 percent, down from 49 percent in 2015. Trends since then are likely unchanged, with competitors continuing to gain share.

Would-be competitors always argue they cannot compete effectively without such rules. The latest petition asks for relief on copper facilities wholesale access. Mandatory access rules for optical access already have been lightened.

source: FCC

The argument for mandatory wholesale (in the past with high price discounts) has been that such steps were necessary to allow competitors to enter the local access market and create the basis for further investment by such firms in their own facilities.

In practice, access networks are so expensive that it often is questionable whether new competitors can entertain “full market” investment in facilities. That is why most such investment has been to support business services in dense customer areas, or optical and other access facilities deployment for consumers only in parts of a city.

The specific rules generally relate to providing voice services. In 2000 some 186 million telco switched voice lines were in service. In 2018, there will be a projected 35 million telco lines in service.

In residential markets, only 11 percent of U.S. households are projected to have an ILEC switched voice line by the end of this year, US Telecom ays.  Indeed, 60 percent of Americans will have abandoned wire line voice service entirely in favor of wireless alternatives.

Of the remaining 40 percent, a majority will obtain service from a non-ILEC- often a cable company or other provider of voice over Internet protocol ("VoiP").

Firms whose business strategies are based on access to unbundled network facilities (serving roughly two million voice lines, total) will oppose the rule changes, for obvious reasons.

Facilities owners will just as vigorously argue that the hoped-for facilities-based competition now is a reality.

If Facebook Wants to Operate a Global Satellite Internet Access Network, What Does That Tell You about Sprint T-Mobile US Strategy?

An application by Pointview Tech (said to be a subsidiary of Facebook) to test low earth orbit satellites provides some perspective on the wisdom and long-term viability of the proposed Sprint merger with T-Mobile US.

The experimental license sought by Pointview Tech suggests Facebook is contemplating a potential role as a supplier of global internet access.

In other words, the move potentially points to interest on the part of Facebook in launching its own constellation of low earth orbit satellites to provide global internet access, in competition with other proposed LEO constellations planned by SpaceX and OneWeb, Boeing and others.

More significantly, such interest points to where the connectivity and apps, content and platform businesses are going. Simply put, the value of stand-alone connectivity, apps-only or platform-only (possibly device-only) business models is questionable, going forward, for tier-one providers in any segment of the internet ecosystem.

Arguments can be made about the impact--positive or negative-- of a successful Sprint merger on competitive dynamics in the U.S. mobile market.

Some might argue that is ultimately not the point, as the stand-alone mobile market, or the broader access market, is unsustainable as a stand-alone business at the tier-one level.

If one believes the future lies in vertical integration (think of Facebook as both app, platform, content and access provider, on a global basis), then even the Sprint tie-up with T-Mobile US is ultimately a waystation on the road elsewhere.

In one sense, that is the problem with regulating when markets are convulsing.

The likely context for any antitrust or diminished competition review is likely to hinge on dynamics within the mobile market, for which there is logic. Both those firms are “mobile access only” companies.

But they operate in a market that most observers would say is moving towards vertical integration. So Google and Facebook become internet service providers, Apple becomes a chip supplier and services provider, Comcast becomes a content developer, while AT&T wants to do the same.

One might argue a Sprint merger with T-Mobile US is the first of a series of future mergers that also would have to be undertaken. But some of us might argue the better move is vertical integration by each firm, now rather than later, with firms positioned elsewhere in the value chain.

Perhaps such partners can not today be found, of course. But some might argue either asset, paired with Comcast, immediately creates a firm with assets in fixed and mobile connectivity; content and apps. That is not to say Comcast would want to do so, right now.

But you get the point. Stand-alone mobile operations, no matter how big, are not the future. At the very least, in the connectivity business, mobile plus fixed is viewed as the better model. And most would agree the future model moves toward firms with multiple roles in the ecosystem.

the market itself is changing, as access services and content and app providers actually are starting to merge vertically. The Comcast acquisition of NBCUniversal was the primordial step. AT&T’s acquisition of Time Warner would be another illustration.

Hypothetically, other entities (tier-one app providers, device or platform providers) might eventually assume major roles in the access business as well. So, eventually, how we define “the relevant market” could be quite different.

Business strategy is the big question. If, as even supporters might argue, the market is changing in ways that favor vertical integration of access and other assets (content, platform, device), a big horizontal merger is no more than an interim step.

The next consolidation would have to have the new entity merging with one or more firms in the app, platform or device areas. And a bigger mobile asset would have fewer potential partners.

Some would argue the better outcome (from a strategy and competition standpoint) would be mergers by Sprint and T-Mobile US separately with “up the stack” partners that would position each firm for the future market (beyond simple mobile connectivity).

In other words, either asset, paired with a tier-one app, platform or device supplier would make more long-term sense. Sprint combined with T-Mobile US would be a bigger supplier of mobile access, but with no fixed network assets, no content assets, no platform capabilities or app assets that create a firm positioned to compete in the coming market.

That is a judgment call, but is the logical conclusion if one argues that a “mobile-only” connectivity position is not sustainable; that a “connectivity only” strategy likewise is unsustainable and that new revenue sources elsewhere than connectivity must be found.

Both Sprint and T-Mobile US need to merge, in other words.  Just not with each other.