How Much Can the "Median" Household Afford to Spend on Internet, Video, Mobile?

With the caveat that higher-income households might not face so many choices, the cost of linear video subscriptions arguably is a problem for median-income households.

Consider the key issue of ability to pay. There is some evidence that explains why lower-cost streaming alternatives (live TV and non-real time) are growing. Researcher SNL Kagan said in 2015 that DirecTV subscriptions represented as much as 2.4 percent of median household income. That was expected to grow to perhaps three percent of median household income by about 2021.

That is unsustainable, some of us would argue. Increasingly, entertainment video is part of total household spending on mobile communications, internet access and other related services. So the issue is not just how much is spent on video subscriptions, but also how much is spent on communications of all types.

In developed countries, household spending on internet access, for example, is less than two percent, but added to just one linear video subscription could mean that as much as 5.4 percent of household spending is for one video subscription and fixed network internet access.

Then one has to add mobile service, which in a four-person household could be close to $200 a month, or perhaps another five percent of household income. So now more than 10 percent of median household income would possibly be spent on mobility, TV and internet access.

That exceeds what most median households probably could afford to spend (again, with the caveat that higher income households might spend more than that amount).

In 2016, the entire household entertainment budget in the United States was about four percent of average income before taxes in 2016, for example.

source: Nscreen Media

According to another estimate, U.S. households spend 5.6 percent of their household income on “entertainment,” but that includes spending on pets, tickets to events, audiovisual equipment such as TVs, hobbies and other services that include video subscriptions. Other U.S. Bureau of Labor Statistics data for 2016 suggest households spend about five percent of income on “entertainment.”

But a study by Pew Research suggested in 2016 that U.S. households spent only about 2.3 percent of income on entertainment.

The implications are clear. Whether you believe a household will spend two percent or five percent of income on entertainment, that budget does not change much. In 1996, Pew researchers say households spend about $1444 on entertainment. In 2016, that amount was $1496. That is the median spending for households with two working parents and two children.

On a per-capita basis, that is only about $374 in 2016, but s single linear video subscription at $80 a month would have represented $960, or 64 percent of the total family budget for all entertainment.

Also, keep in mind that healthcare spending in 2016 was about eight percent per household, according to the Bureau of Labor Statistics.  Even spending on clothing is nearly And recall that pet expenditures also are considered “entertainment.”

If you want to know why a shift to lower-cost video subscriptions is happening, part of the reason is that traditional video subscriptions cost too much, as a percentage of total available entertainment spending.

source: Creditloan.com

Still, some 63 percent of U.S. households have both linear TV and at least one streaming service as well, according to Leichtman Research Group. But more change is coming. In the second quarter of 2018, more live streaming accounts were added than linear accounts were lost. In fact, live streaming accounts grew as much as four times faster than linear accounts were lost.

In the second quarter, the major linear service providers lost about 417,000 accounts, while six million to seven million live streaming accounts were added.

In addition to Netflix, Amazon Prime and other streaming services that provide non-real-time content, there is a new class of “live TV” streaming providers that are certain to become more important, as they are an even more-direct replacement for linear (live TV) services.

In the second quarter of 2018, for example, such co-called “virtual multichannel video programming distributors (vMVPDs) added 868,000 net accounts.

The total number of vMVPD accounts then reached 6.73 million, an increase of 119 percent, year over year.

Linear TV accounts (cable, satellite, IPTV, vMVPD) fell to 93.78 million, according to Strategy Analytics.

source: Strategy Analytics

Linear Video Demand Might be Stronger Than You Think

New Cord Evolution research from GfK MRI shows that 71 percent of all US consumers say they have cable, satellite, or telco TV service and have no plans to drop it. This includes the majority of the crucial 18-to-34 age group (58 percent), as well as 69 percent of people ages 35 to 49, and 80 percent of those 50 and over.

Two decades ago, the thinking often was that younger consumers inevitably would start to behave as did older age cohorts. Very few now are so sure.

But there remains a big difference between demand for various forms of entertainment subscriptions and demand for entertainment. The former might change; the latter arguably does not. So the form of supply is likely to evolve.

But cord cutting--the shift to internet-delivered content services--does not diminish demand for such content. And even linear forms of delivery might decline rather slowly if suppliers are able to tweak the value proposition.

Virtually nobody disputes the notion that consumers are less inclined to buy linear video services these days, or that streaming alternatives are the new choice for most consumers, either as a complement or substitute for linear subscriptions.

But entertainment video substitution might--or might not--not take the pattern of voice substitution, in terms of simple abandonment an older landline product and a shift to mobile substitutes.

And demand change was more complicated than we often suppose. In addition to the value of mobility, cellular phones personalized voice communications. Where voice was a service “to a place,” mobile telephony changed the context to “communications with a person.”

So mobility represented higher value, not just a change of cost function.

At the same time, the value of internet apps and experiences also changed the role of the devices, lead apps and volume of interactions.

In the case of landline voice, customers in developed regions simply are abandoning their landlines, as mobility provides a satisfactory or preferred use mode. People in the U.S. market also are simply calling less, as more communications take other forms.

The point is that linear video cord cutting might take more-subtle forms than we think, at least in part because content contracts make linear services the only way to get some content, or make the cost of access to much desired content too complicated or expensive any other way.

There are, in other words, many instances where a “lower price for the content you want” strategy will prevent or slow the rate of cord cutting.

In the case of entertainment video, the value of a linear subscription endures, for many consumers. It is the perception of price and value that generally leads to abandonment. That is why “skinny bundles” should work: such bundles change the value proposition.  

Nor are streaming services a complete alternative to linear services. That is why so many people try to “cut the cord” and find the present alternatives not as attractive as once believed. Sports content, for example, often cannot be obtained except as part of a linear bundle.

Value also is why so many people buy both linear and over the top streaming services, or buy multiple streaming services.

In the case of text messaging, people switched to substitute apps, so that in the United Kingdom, for example, the typical user now sends fewer messages in 2017 than in 2012.

The big legacy providers of linear video will continue to reprice and repackage linear offers in ways that boost value while containing retail cost.

source: eMarketer

What is Impact of Industry Concentration on Competition?

Mobile virtual network operators--especially smaller MVNOs--are warning that a proposed merger merger between T-Mobile US and Sprint will lead to more concentration and higher prices. Such warnings are as expected as the touted advantages claimed by industry segments evaluating any major changes in industry policy.

In some ways, it cannot be argued that the proposed merger makes the market more competitive. By definition, the merger reduces the number of major competitors in the market. Granted, on some measures the U.S. market still is less concentrated than some other major mobile markets.

And there is an argument to be made, in many segments of the communications business, that greater scale has become a fundamental requirement. And, in principle, a bigger number-three contestant could use its greater scale to push even harder at industry pricing levels and the value proposition.

But few observers seem to expect more competition as the end result of a merger between Sprint and T-Mobile US.

Even if one is of the opinion that merger rules are more relaxed now than under the prior presidential administration, some quantitative tests always are used by the Department of Justice when evaluating proposed mergers, and immediate past precedent might be a key issue.

The proposed merger of AT&T and T-Mobile in 2011 was scuttled because the Hirschman Herfindahl Index (“HHI”) would have increased by 700 points in an industry already classified by the HHI and highly concentrated. The HHI is a standard tool used by regulators globally and will be used again as Sprint and T-Mobile US propose to merge.

It is not incorrect to read the DoJ’s objections to that earlier merger as opposition to any merger between two of the four nationwide providers of mobile wireless services: AT&T, Verizon, T-Mobile and Sprint.

The proposed merger of the third- and fourth- largest U.S. mobile companies would increase the HHI by over 400 points, meaning market concentration, in an industry already deemed highly concentrated (if less concentrated than some other markets), would increase.

“Like the failed AT&T and T-Mobile merger a few years ago, the proposed merger between Sprint and T-Mobile will be presumed anticompetitive and thus heavily scrutinized by antitrust authorities,” says George Ford, Phoenix Center for Advanced Legal and Economic Public Policy Studies chief economist.

To be sure, executives from T-Mobile US and Sprint say the additional scale provided by the merger will allow the bigger firm to continue to be aggressive in attacking prices, or will allow the firm to invest in 5G at a faster rate.

But I have yet to find an equity analyst who believes that will happen. Quite the reverse is expected, in fact: less price competition in the U.S. mobile market. An oft-noted conclusion is that a bigger number three firm would have less need for price cuts as a primary competitive weapon. Not is that view confined to equity analysts and market researchers.

Nor will some market watchers think the recent DoJ opposition to the AT&T acquisition of

Time Warner--a vertical merger of the type that tends not to be challenged--is a good omen, on that score. If DoJ objects to a type of merger that usually is not viewed as problematic, what is DoJ going to do with a type of merger that, by definition, will be viewed as problematic?

To be sure, the telecom industry virtually always has been concentrated for most of the past 150 years. But the level of concentration grew more than 100 percent between 2000 and 2014.

Percent Change in Market Concentration and Regulation 2000-2014
Industry	HHI Index
Hospitals	11%
Health Insurance	79%
Banking	100%
Telecom	101%
Airlines	16%
Auto Industry	-34%
Energy	31%
Average Change	43%

source: American Action Forum

In U.S. Market, Tier Ones Have to Grow by Acquisition

If you run a consumer fixed line communications business, flat video entertainment revenues are not the best of all possible outcomes. But compare that sort of performance to the fixed line voice business, or to mobile segment revenues, which have driven revenue growth at most telcos for the past two decades.

Flat video entertainment revenues have to be evaluated against what is happening in other lines of business, as well. In the U.K. market, telecom revenue has dropped 1.7 percent per year since 2012. Globally, we might be nearing an absolute industry peak revenue situation, after which it is possible global connectivity revenue could start to gradually decline.

The trend to price retail services at marginal cost, a trend I refer to as near-zero pricing, is part of the backdrop, leading to declining average revenue per user.  

Consider that AT&T’s fixed network voice revenues are dropping about 18 percent annually, costing that firm about $1 billion a year in lost revenues that need to be replaced.

source: Seeking Alpha

And what is happening in the mobile category? Revenue arguably is declining there as well, for both AT&T and Verizon. And that raises the biggest strategic issue for most communications service providers: what must be done if connectivity revenues have reached their historic peak?

In other words, what if communications connectivity has already, or will soon, reach the top of its life cycle, with a period of decline to follow?

That arguably is the case for most communications categories, ranging from linear video to voice to mobile service. Only internet access revenues have continued to grow, driven by growth in emerging markets and by a shift to higher-speed tiers of service in some developed markets.

source: Seeking Alpha

source: Seeking Alpha

That is why some believe big changes are coming. A massive wave of consolidation will help surviving service providers sustain revenue growth by acquisition. There will be some benefits on the cost side as well, as additional scale is gained. That might account for the biggest single change in firm economics over the next decade.

But eventually, when that trend as run its course, there will be no alternative to adding additional lines of business “up the stack” or elsewhere in the communications, app, platform, device and content ecosystems, still the era of communications growth will have ended.

Though mobile services have been the global revenue driver, we are approaching a time when every human who wants to use mobile service does so, and eventually we will be at a point where every human who wants to use internet access will do so.

That is not to say all firms are in the same position. Smaller firms can take share from larger firms. Mobile substitution will shift additional share from fixed to mobile networks. Specialist firms of all types might continue to grow in their niches, up to a point.

And the same growth by acquisition dynamics that will apply for tier-one telcos will hold for all specialist firms as well, for some time.

Still, eventually, if the “connectivity” business continues to shrink, growth will have to be sought elsewhere. And that probably has to happen with acquisitions, rather than internal growth, for reasons of scale.

By definition, communications firms with flat to declining revenue cannot generate growth organically. It will have to be bought. Even T-Mobile US, which continues to take market share from its competitors, sees acquisition (Sprint) as the best way to achieve much more scale.

	Subscribers (millions)	Net Adds (thousands)	Postpaid Adds (thousands)	Postpaid Churn
Verizon	152.65	37	199	0.97%
AT&T	147.26	499	46	1.02%
T-Mobile	75.62	777	686	1.08%
Sprint	53.79	92	87	1.63%
U.S. Cellular	5.05	-	-	-

source: Morgan Stanley

Since most of its competitors have churn rates similar to its own (the exception is Sprint), T-Mobile US gains on its larger competitors simply because one percent losses at a firm the size of Verizon or AT&T represent a larger number that at any smaller firm.

That means T-Mobile US arguably stands to gain share, even at the same churn rates as its larger foes. Still, eventually, all U.S. mobile service providers have to deal with saturated markets and declining average revenue per account.  

Though Comcast and now AT&T are criticized by some for expanding into content ownership, those are prudent moves (some argue) to reposition revenues away from an exclusive reliance on communications products and sources.

source: Morgan Stanley

source: Morgan Stanley

source: Morgan Stanley