IoT "As a Service"?

Turning products into subscriptions (everything as a service) is a big business shift many believe is irresistible. Automating the process of buying staple products or discretionary products Is a way to lock in repeat business. And some would note that 41 percent of all consumer purchasing is repeat business.

Communications providers have some experience with turning products into services. Hosted business voice (hosted IP PBX or hosted IP telephony) provides a recent example, where a recurring subscription replaces a customer’s need to own and manage a business phone system.

Smartphones often are functionally subscriptions, not “products.” Even if consumers actually buy their devices, they often do so as two-year payment plans. And as support for many devices now routinely lasts for only three years, for many consumers “ownership” of a smartphone resembles a “phone subscription.”

Most of the time, a user is making monthly payments on a device. By the time the device is fully paid for, it might be time to get a new model, either because the battery no longer holds a charge well, or because the phone has wear and tear. Personally, I find battery life is the key driver of replacement cycles.

Application and software providers likewise are attempting to turn their shrink-wrapped products into recurring subscriptions. Even jet engines now can be used as a subscription, rather than a purchased product.

Many believe cars will become a service. As the example of pizza might suggest, “build versus buy” or “own versus lease” applies to enterprise computing. The issue is how much IoT as a service might be leveraged by communications service providers.

source: episerver

The key issue for communications providers is that most of the legacy services already are subscriptions. So the chief issue is what new lines of business can be created that take advantage of the “subscriptions, not products” trend.

Almost by definition, that requires service providers to move into new areas of the value chain that traditionally have been purchased, rather than leased or rented. Smartphones would seem to be such an area.

But bigger opportunities probably lie in the internet of things value chain, where service providers could bundle devices, applications, monitoring, analytics, installation and maintenance “as a service.”

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Amazon Makes Another OTT Move

Amazon just spent $1 billion to buy online pharmacy PillPack, which PillPack, which supplies medications direct to home in 49 U.S. states, excluding Hawaii. The U.S. pharmacy business currently represents about $400 billion in sales value, so it might be obvious why Amazon wants in.

On the day the deal was announced, incumbent pharmacy suppliers and pharmacy benefit managers lost about $20 billion in market value. The same thing has been happening to virtually all other retailers whenever Amazon decides to enter their segment of the business.

Telecom industry professionals should understand the business issue quite well. What Amazon is doing is taking out the middleman, a process called disintermediation.  

Telcos encountered this some time ago. Skype, Google, Facebook and others now supply messaging and voice services themselves, allowing their users to communicate without buying a service other than internet access from any internet service provider.

Netflix and others now offer video entertainment services that compete with and replace linear video subscriptions. In fact, Google competes directly as an internet access service provider (Google Fiber), acting not only as the app provider but also displacing the ISP role as well.

Disintermediation means the “reduction in the use of intermediaries between producers and consumers.” In other words, cutting out the middleman, and going direct to one’s customers, without the use of other distribution channels.

So one big impact of huge content and app firms building and operating their own networks is that the size of the public communications market is reduced. In other words, a growing percentage of international bandwidth no longer moves over public networks, supplied by public carriers (telcos or capacity specialists).

Depending on the route, private bandwidth supply represents as much as 30 percent to 70 percent of total traffic on those routes.

The other impact is falling prices. With some exceptions, bandwidth prices on undersea routes have fallen steadily, but not precipitously, over the last decade or so.

One issue, as noted, is that traffic now is shifting to private networks owned and operated directly by content companies, app companies and other enterprises, who no longer need to buy such long-haul capacity from commercial providers. That means fewer potential customers, and therefore more competition to secure what remains of demand for public network services.

Skinny Bundles and Viewer Preferences

The thing about WatchTV and other skinny bundles is that they are, by definition, “skinny.” They also tend to feature packages of channels that do not cost much, which is one key way of limiting  retail prices.

The problem for perhaps many potential buyers is that such bundling of less-costly channels also means some broad interest but expensive channels (ESPN and other sports) are not in the bundles.

source: Nielsen

And here you might glean some of the logic behind the Time Warner acquisition. Several of the most-expensive channels (TNT, CNN, TBS) are in the WatchTV bundle, and AT&T owns all three.

Still, as more users are discovering, purchasing multiple subscriptions often is needed to assemble a menu that matches (more or less) any single person’s interests. In part, single ad-supported channels sometimes are not available to buy, at all, as contracts might prevent it, in some cases, while business models are unattractive for suppliers, in other cases.  

source: Digitalsmiths

The problem is that while most households watch just about 17 or 18 channels, they are not usually the same 17 or 18. Undoubtedly, each person, in each household, also has a rather unique viewing pattern, as well, possibly including a dozen or fewer channels that are routinely viewed.

source: Nielsen

source: AT&T

Does 5G Access Cause, or Only Reflect, Underlying Innovation?

Some observers seem to believe rapid 5G mobile adoption equates to broader economic activity related to 5G (applications, platforms, devices). So early 5G adoption provides an advantage.

Some of us do not really agree with that assessment. As with some other measures of adoption, rapid 5G adoption might simply reflect other developments, rather than causing them.

Some believe supplying high-speed internet access boosts economic growth. Others might argue that high economic growth drives higher incomes, which in turn leads to more availability and use of high-speed internet access.

In other words, faster broadband tends to follow economic success, not cause it. If that is the case, then early 5G deployment simply is a reflection of economic growth drivers already in place.

source: Ericsson

Mobile Media Consumption Now Approaches TV Levels

There is a simple reason why some tier-one mobile service providers believe they will profit from mobile entertainment and advertising: that is where people increasingly are spending their time consuming internet-delivered media content. And advertising “follows eyeballs” (audiences).

Until recently, U.S. digital media consumption did not rival television or radio media consumption, but digital media consumption now exceeds TV and radio combined, while most other categories of media consumption are decreasing.

One can see the same trend in China, where digital media consumption is greater than television, for example. And digital media consumption also has moved from the desktop to the mobile device.

source: comScore

source: eMarketer

One can ask legitimate questions about whether any mobile service provider can create an advertising platform to compete (at some level) with the likes of Facebook, Google or Amazon. But the logic of trying to do so is clear enough.

Media consumption on mobiles creates both new revenue sources (advertising and subscriptions) as well as new sources beyond simple internet access (connectivity).

Media and Telecom Debt Bomb?

If an anticipated wave of big media and communications mergers happens, a significant number of big firms are going to come under scrutiny for their new debt loads. Right now, AT&T is in the spotlight, but either Disney or Comcast or maybe both will face scrutiny as well, as their debt loads are going to climb, depending on which firm winds up buying the Twenty-First Century Fox assets.

But those moves perhaps illustrate the risks firms in the media and communications industries now might have to undertake in order to reposition for the next phase of industry change.

Adding debt to acquire new assets is a gamble many firms will conclude they must make. For media firms, it now appears that Netflix has changed the game, forcing both a new global distribution focus and a need to shift beyond traditional distribution to streaming alternatives at greater scale.

For tier-one access providers, the issue longer has been the maturation of the access business (fixed and mobile) and the search for alternative revenue sources as voice, messaging and internet access businesses shrink or plateau.

There were many criticisms of the AT&T acquisition of DirecTV at the time. Some believed that AT&T would have been better served investing capital in its fixed network. Others argued that even if AT&T wanted to grow its video subscription business, it would have been better to try and grow organically. Some argued that linear video was a mature business, at best.

Some focused principally on the debt load. Others might have focused on the purchase price, which is related to the issue of debt burden.

AT&T of course had, and has, a strategic rationale. The company has a voracious free cash flow need to support and grow its dividend. The firm arguably also was executing on a plan to move revenue opportunities “up the stack,” into applications. And video entertainment subscriptions are among the few huge and proven consumer apps that are dependent on the networks AT&T operates.

Since then, video has contributed to supporting AT&T’s mobile business, apparently reducing churn and increasing net new subscriptions. In 2017 the entertainment group generated $51 billion of revenue, throwing off $11.6 to $12 billion in revenue every quarter, mostly from video operations.

Those results suggest AT&T could not have grown its video business organically. DirecTV contributes about 82 percent of AT&T video subscription revenue, and AT&T now is the largest U.S. linear video provider, something it almost certainly could not achieved, in the years since the DirecTV acquisition, had it tried to grow organically.

At the end of the fourth quarter, AT&T had about 3.7 million linear video accounts, while DirecTV had 20.3 million accounts. One might well argue it would have been impossible for AT&T to grow its linear business organically, by an order of magnitude, in just a couple of years. Even if AT&T had unlimited capital to invest in its linear video business, it could not have grown that fast.

To be sure, profit margins from the consumer segment are far lower than from business services or consumer mobility, but DirecTV also represents 70 percent or more of consumer fixed network revenue, and perhaps 25 percent of free cash flow (prior to the Time Warner acquisition, which might add another $4 billion of free cash flow and perhaps $31 billion in annual revenue).

Is there risk? Of course. But the traditional media and communications industries are under pressure, and consolidation is among the ways they hope to cope with greater competition and slower growth in the core businesses.