U.S. Cable Operator Business Services Revenue Up, How Much More Remains?

The U.S. cable industry is poised to earn $18 billion in business services revenue in 2018, and possibly reach $20 billion toward the end of 2019, according to some analysts. That is the good news for cable executives, as business services now is displacing internet access as the driver of new revenues.

The bad news is that, by some estimates, current revenues already exceed total spending by small and medium-sized U.S. businesses. Granted, U.S. cable companies sell to enterprises, not just SMBs. But the sales figures might suggest that much of the SMB opportunity already has been gained.

Comcast Business alone is on an annual run rate of $7.2 billion, with Charter Communications Inc. (Spectrum Enterprise), at about $6.2 billion, according to Standard & Poors.

Obviously, the biggest portion of future growth now must come from sales to enterprise customers.

source: CMG

Some analysts believe there is additional growth available in the business customer market in the “micro” (less than 10 employees) segment of the business market. That might be true in some markets globally.

In the U.S. market, it is likely the case that virtually all that market already is served by cable or telco suppliers. It is hard to quantify, as tier-one service providers tend to sell to such small organizations using the same channels as the consumer market.  

source: Analysys Mason

Mobile Content, Ad Revenue is Climbing: What Will 5G Mean?

What does it mean if, by 2020 global mobile data consumption on smartphones overtakes fixed-broadband data consumption, as researchers at Ovum now predict? It depends. What happens if the global media industry gains $765 billion in cumulative revenues from new services and applications enabled by 5G ($260 billion in the US and $167 billion in China)?

Can 5G cause annual mobile media revenues to double in the next 10 years to $420 billion in 2028 ($124 billion in the United States)?

As with all forecasts, assumptions are everything. Ovum researchers assume 5G will unlock augmented and virtual reality applications that will create more than $140 billion in cumulative revenues between 2021 and 2028 ($32 billion in the United States).

Mobile display advertising will reach $178 billion worldwide by 2028 ($66.6 billion in the United States). Ovum researchers believe 5G will have a fundamental role in transitioning traditional display advertising toward social and media immersive experiences.

Also, 5G mobile games revenue will exceed $100 billion annually in 2028 ($20 billion in the United States).

The big takeaway is that Ovum researchers expect mobile content and mobile advertising will drive potential mobile service provider revenues. How much of that increase is directly from 5G, and how much is a secular shift to mobile platforms for media and advertising is a question nobody can really answer.

source: Intel

In many countries where mobile broadband is the dominant way people use the internet, it should not come as any surprise that mobile internet access data volume eventually overtakes fixed network volume.

In countries where fixed network broadband is ubiquitous, the changes could be more profound.

Some coming changes are obvious. “As 5G speeds ramp up, the existing differentiation in broadband speeds by cable over cellular will likely erode,” researchers at Ovum say. In principle, that means mobile substitution for fixed access will be more feasible.

What is not so clear is what that trend could mean for incumbent and mobile suppliers of video entertainment services and apps. It is true that “5G will help operators capitalize on mobile media growth.” What that means for the fortunes of over-the-top providers, compared to linear distributors, is less clear.

AT&T, the largest linear video distributor in the U.S. market, already is committed to replacing its satellite platform with OTT streaming. The point is that the difference between linear and OTT streaming is becoming more subtle. The same owner can supply both, even if gross revenue or profit margins differ. And it already appears that video consumption on mobile devices is growing.

Depending on supplier and user behavior, more OTT streaming might displace or might simply augment consumption on any number of devices. Some suppliers might not care too much whether a customer consumes on a mobile phone, a tablet, a PC, a game console, a TV, on an auto, airline or other screen.

Other suppliers, unable to operate in an “any mode” context with ease, could suffer.

Nor is it so clear what percentage of overall consumption of augmented reality, virtual reality, enhanced gaming, in-vehicle services and so forth should be specifically allocated to 5G or mobility. Mobile phones with 5G will make all those use cases readily available. But not all new use cases can be specifically enabled by 5G.

source: Intel

The point is that mobile content subscriptions and mobile advertising are going to grow. Just how much, and how much will be enabled specifically by 5G, is hard to determine with precision.

AT&T Plans to Decommission DirecTV and got Direct to Home OTT

Most connectivity providers selling retail services to consumers have struggled--often unsuccessfully--to create over-the-top services that compete well with other third party apps. But AT&T might be among the first to do so at scale, essentially ending delivery of video by satellite and switching instead to OTT streaming delivery.

Among other implications, that will drastically cut operating costs, as customers will be able to self-install the new set-top that supplies the service, using any broadband connection. That also means AT&T will retain--as it does with DirecTV--the ability to sell service to virtually any U.S. household, where it has local access networks and where it does not.

“It’s a device that allows us to, instead of rolling a truck to the home, we roll a UPS or FedEx truck to the home and deliver a self install box,” said AT&T CFO John Stephens. That streaming product also would replace U-verse television services. AT&T expects to begin offering the streaming service in 2019.

Among the other advantages is lower customer acquisition cost, which in the case of DirecTV includes the truck roll, cost of the satellite receiver and dish, more-costly set-tops and labor to install the dish and perhaps install inside wiring.

It is a high-reward move from the largest provider of linear video services in the United States.

Build it and They Will Come

Like it or not, our history with 4G networks, which was in many respects a “build it and they will come” exercise in hope, will characterize 5G as well. Few claim to be sure precisely where new revenues will be created, though as a generic, most believe internet of things and other ultra-low latency use cases will develop, at scale.

In the near term, the more-prosaic use cases will be capacity to support consumer mobile broadband. The near-term new use case is 5G fixed wireless. Ever since 3G, observers have expected creation of many new use cases killer apps and revenue streams, but such use cases have had to be discovered and created.

It would not be unfair to characterize the actual use cases as somewhat unexpected. Early on in the 3G era, video calling was a hoped-for new “killer app.” That did not happen. But it has become commonplace on 4G networks. In a similar way, content services were expected to flourish in the 3G era. That did not happen until 4G.

Augmented reality apps were supposed to develop on 3G networks. That still has not happened.

In fact, many would find it hard to point to a killer app for 3G. Eventually, new apps do emerge. And some might say the early value of 4G was just speed. But the actual use cases often are unexpected.

You might argue text messaging was the new killer use case for 2G. You might suggest mobile email and Internet access was the legacy of 3G. Video entertainment is developing as the singular new app that defines 4G. So “build it and they will come,” as discredited as that might be, seems to be what happens when next-generation mobile networks are deployed.

“Build it and they will come” became a discredited phrase in the collapse of the telecom and internet bubble that destroyed trillions in equity value. Over a two-year period between 2000 and 2002, 500,000 jobs were lost in the U.S. market alone.

source: Morgan Stanley

The Dow Jones communication technology index dropped 86 percent; the wireless communications index, 89 percent.

Some $2 trillion worth of equity value in telecom companies vanished. Scores of firms went bankrupt in the 2000 to 2002 period alone.

One clear problem was investment far in advance of actual commercial market demand, despite the correctness of the long-term vision of capacity growth fueled by use of the internet. Simply, between 1999 and 2002 too much new capacity was added to the market.

Many who lived through that period developed a healthy respect for skepticism about any “build it and they will come” investment plans. Clearly, that approach failed during the height of the telecom bubble.

source: Science Direct

And still, “build it and they will come” was largely a reality for 3G and 4G and remains so for 5G. The problem always is that we cannot predict which big new use cases and revenue will develop.

No prudent executive will claim to be staking the future on investments whose revenue models are uncertain. Yet that is precisely what has happened, to a large extent, since 3G. Sure, “faster speed” is an easy justification. Beyond that, nobody has been terribly good at predicting how that will enable new apps, use cases and revenue.

Video--With All its Issues--is the Biggest Consumer Market Opportunity for Fixed Network Telcos

Fixed network telcos face extreme threats to their core business models as sales of legacy products diminish and as average revenue per unit sold drops, even as usage skyrockets. But there is some disagreement about the wisdom of telcos getting into the video entertainment business, and in what roles.  

Consider only the role of video distributor. One conclusion many observers reach about linear video services is that the product is declining enough that it is not a fruitful area for telcos to pursue.

Linear video in the U.S. market is past its peak, to be sure, even as streaming alternatives proliferate. Most believe the revenue implications are clear enough: linear services with higher average revenue per unit (ARPU) will be displaced by streaming services with lower ARPU. But many, perhaps most streaming customers will buy more than one service. So, ultimate revenue impact is not as clear as one might suppose, if there were a one-for-one substitution of streaming for linear accounts.

source: Strategy Analytics

Others might point to Comcast’s strategy, which has been to diversify away from linear video distribution since 2008, as providing further evidence of limited potential. But that is a matter of incumbent firm strategy.

In the competitive era, telcos have taken video share as cable companies have taken internet access and voice share. The point is that what is rational for Comcast is not rational for AT&T or Verizon.

source: nScreenMedia

But there are several reasons why it makes total sense for fixed network telecom firms to  invest in linear video, even as it declines. For starters, there are very few mass market services in high demand by consumers and requiring network services. There is voice, there is internet access and there is video. All other sources remain niches, and mostly small niches.

All existing “at scale” telco products (voice, messaging, internet access, most business services) are flat to declining. Also, mobility is the biggest revenue driver for many service providers. The corollary is that the entire fixed networks business is smaller, and, in many cases, shrinking rather than growing.

So much sales volume now is in the mobile domain that the total fixed network business often is quite small, compared to mobility. That is true for AT&T, SK Telecom, Elisa and Swisscom, for example.

AT&T now earns close to 70 percent of total units sold from mobility (business and consumer), about 18 percent from video about five percent from fixed network voice and less than 10 percent from voice services.

The gross revenue and profit percentages do not match completely, but the big point is that for AT&T, fixed network voice and internet access are too small to make a difference in overall revenue and especially growth.

The other important point is that the video distribution business, on AT&T’s fixed network, already is bigger than voice and internet access put together.

source: Huawei, IHS Markit

Recent moves by AT&T might suggest what is possible. By units sold, AT&T product sales in the consumer market are more than 50 percent of total. Internet access represents less than 25 percent of units sold, while voice produces more than 25 percent of products sold.

Other major telcos have different sales profiles, but many leading telcos earn significant revenue from video distribution services, rivaling in many cases revenue earned from providing internet access services.

source: Huawei, IHS Markit

As a practical matter, there are few brand new revenue sources big enough to make a difference on fixed network service provider financial statements, where it comes to consumer services.  

How Much Share of the Enterprise Edge IT Market Can Service Providers Take?

Market share in the software-defined wide area networking market is difficult to pinpoint, as it combines sales both of networking hardware and carrier services.

SD-WAN hardware includes appliances and routers, SD-WAN software that includes orchestrators, gateways, cloud routers and firewalls, dashboards, management systems among others, and SD-WAN services that includes service provider managed SD-WAN services.

Beyond that, early estimates vary by nearly an order of magnitude. Observers might debate the importance of SD-WAN as a service provider product, but the strategic upside comes in two ways.

First, it is possible that SD-WAN, as a way of connecting branch offices, becomes a growth market in its own right, displacing other solutions enterprises have used. So it is possible that carriers can take much market share from appliance and software suppliers.

source: Gartner

The longer-term possibility is that SD-WAN becomes the enabler of other value and revenue service providers can supply. 

So far, as most of the SD-WAN activity has been appliance-based and installed by enterprises or other end user organizations, most of the sales activity has been garnered by edge equipment suppliers, not service providers.

source: Gartner

The expectation is that, over time, more share will be taken by service provider offers (SD-WAN as a service, if you like that formulation). That belief is bolstered by the likely use of SD-WAN as a replacement for other carrier services.

On the other hand, some might argue that since SD-WAN increasingly bundles the functions of encryption, path control, overlay networks and subscription-based pricing together, the edge equipment approach to SD-WAN in many instances will be a substitute for other purchases enterprises have made in the past (routers, security appliances and software, special access services).

source: Juniper Networks  

In a broad sense, the service provider opportunity likely will involve building on SD-WAN connectivity to supply additional features and services.

source: IDC

The issue, perhaps, is how much of the value of edge equipment market overall service providers can replicate “as a service.”

source: Open Networking Summit

FTTH or Time Warner? It Is Not a Close Call

Would AT&T have generated more incremental revenue if it had not bought Time Warner, and instead had plowed that capital into a massive fiber to home upgrade?

The numbers suggest AT&T made a better choice buying Time Warner.

AT&T spent $85 billion to acquire Time Warner, with an immediate quarterly revenue boost of $8.2 billion. Were AT&T able to invest in fiber to home and then take an incremental five percent share of market everywhere it operates, is perhaps $2.2 billion in annual revenues, assuming $50 a month in gross revenue, or about $180 million a month in incremental revenue.

It is not clear how much upside exists for AT&T, in terms of fixed network internet access revenue, even if it were to dramatically extend its FTTH footprint, but you might argue that the best case for AT&T, for a massive upgrade of its consumer access network, is about 10 percent upside in terms of consumer market share, facing cable operators already leading the market in accounts and speed, with a clear road map for additional speed increases that easily match anything AT&T might propose, and arguably at less cost.

So here’s one take on the alternatives of buying Time Warner or using that capital instead to expand the AT&T FTTH profile. Consider the incremental revenue generated from each alternative.

Assume first that U.S. telcos could take 10 percent more market share from cable TV suppliers. Incremental revenue might then be less than $4.4 billion annually. Consider that AT&T has footprint covering perhaps 69 percent of U.S. homes. So make the incremental revenue for AT&T $3 billion, or $250 million per month.

Also, it would take some years before that degree of new FTTH assets could be put into place. Over any three-month period, AT&T might expect incremental revenue ranging from $540 million to $750 million per quarter, the former figure representing five percent share gain, the latter representing 10 percent share gain.

Neither comes close to the $8.2 billion per quarter AT&T picked up from the Time Warner acquisition.

Verizon has different strategic issues, compared to its main fixed network competitors.

Significantly, Verizon has a small geographic footprint, compared to any of its main fixed network competitors. Verizon homes passed might number 27 million. Comcast has (can actually sell service to ) about 57 million homes passed. Charter Communications has some 50 million homes passed.

AT&T’s fixed network represents perhaps 62 million U.S. homes passed.

Assume there are 138.6 million U.S. housing units, of which perhap 92 percent are occupied (including roughly seven to eight percent of rental units and two percent of homes). That suggests a potential base of 128 million housing units, including rooms rented in homes or apartments, that could buy services from a fixed network supplier.

That implies Verizon has the ability to sell to about 21 percent of homes; Comcast can sell to 45 percent; AT&T can market to 48 percent of occupied homes; while Charter can sell to 39 percent of U.S. occupied homes.

The point is that Verizon has more to gain than AT&T, Comcast or Charter from investing in internet access outside its traditional geography.

In principle, Verizon faces the same issue as does AT&T when weighing alternative uses of scarce capital.

As it deploys 5G fixed wireless, there are two key issues: how much market share and revenue can Verizon gain, and what else might Verizon have done with its investment capital? It all depends on one’s assumptions.

Some argue that, over seven years, Verizon might gain only 11 percent to 18 percent share in markets where it can sell 5G fixed wireless. Verizon believes it will do better, and some believe a 20-percent share is feasible. Verizon itself predicts it can get about 23 percent share, as a minimum, over seven years, representing about 6.3 million accounts.

Assume Verizon fixed wireless gross revenue is about $60 per account (a blend of the $50 from Verizon mobile customers and $70 from non-customers). Assume annual revenue of perhaps $720.

Assume Verizon spends about $800 per location on 5G fixed wireless infrastructure (radios, backhaul, spectrum costs), even if those same assets can be used to support other users and applications.

At 20 percent take rates, that implies a per-subscriber network cost of perhaps $4000.

Assume a cost of perhaps $300, over time,  to turn up service to accounts. That implies a rough break even in months. Assume total capex investment of perhaps $4300 per account. At $720 annual revenue, that implies breakeven on invested capital in six years.

But assume half the cost of the capital investment also supports revenue generation from other users and use cases (mobility, business users, internet of things). In that case the fixed wireless capex is perhaps $$2150 per customer, and breakeven on capex is a bit more than three years, assuming the only revenue upside is internet access revenue.

Logically, one would have to add churn reduction in some cases, and so the lifetime value of a customer; incremental advertising opportunities; some possible upside from voice services or wholesale revenue. None of that is easy to quantify with precision.

The point is that potential return might fall well within a framework of payback in three years.

Whether that is a “good” investment or not depends on what else might have been generated from other capital deployments.

Over a seven-year period, Verizon might have committed $13 billion in capex to generate revenue from six million fixed wireless accounts (about $1.85 billion per year). It is hard to image any alternative use of capital at that level that would result in annual revenues of $4.3 billion in internet access revenues alone.

It is in fact quite hard to create a brand new business generating as much as $1 billion a year in incremental revenues, under the best of conditions.

source: ITU

So, back to the importance of video revenues, as difficult as the Time Warner debt burden might be, the renamed Warner Media already generates $32 billion in annual incremental new revenue for AT&T. Virtually nobody other than its competitors is likely happy about the new $55 billion worth of new debt AT&T has acquired.

Still, the issue is what else AT&T could have done with $55 billion that would immediately create $32 billion in new revenues. Personally, I cannot think of another transaction that would have produced that much new revenue, immediately.

AT&T could have spent that money on fiber to home upgrades, to perhaps gain five percent to 10 percent additional market share in the consumer internet access market, in region, over perhaps five to seven years. The upside, even at 10 percent share gain, does not approach the Warner Media contribution.