How Much Upside from Mobile Substitution for Fixed Internet Access?

Strategy always is affected by a firm’s assets and liabilities. Consider U.S. fixed networks. Comcast, Charter and AT&T have 50 million to 60 million residences in each of their service areas. Verizon has but 14.6.

So relatively speaking, Verizon has much more to gain by attacking outside its fixed network footprint. It also has a smaller installed base to attack, compared to the other three biggest fixed network service providers.

AT&T, by virtue of its smallest ISP customer base, likewise is a less-inviting target. Of all the biggest four service providers, AT&T has the greatest need for a platform better able to compete for internet access customers.

T-Mobile US, with virtually no fixed network assets, has talked about attacking the installed base of cable internet access customers, for example, because cable has the lion’s share of customers to be taken.

source: Mobile Experts

Comcast has 45 percent take rates for internet access; Charter 48 percent; AT&T 26 percent and Verizon 48 percent.

Of the four biggest fixed network ISPs, Verizon has the greatest upside from out-of-region market share gains, while AT&T gains most from lower-cost access infrastructure of all types.

Cable operators, as the market leaders in internet access, have the most share to lose. Comcast and Charter are among the service providers with the most potential exposure, as both have big footprints and relatively high ISP market share. Verizon has relatively high share, but a much-smaller number of customers.

The ability to use the mobile platform to take fixed network internet access share therefore very much appeals to T-Mobile US, Verizon and AT&T.

At least in part, the big push by Comcast and Charter to supply gigabit speeds is a reflection of that exposure. Cable hopes its lead in gigabit internet access will provide protection against the assault from mobile and wireless alternatives.

Will Telco Acqusition Strategies Have to Change?

Over the last few decades, many mobile service providers have grown their revenues by making horizontal acquisitions of similar firms in different geographies. In recent years about $119 billion worth of transactions have happened in the telecom industry.

source: IMAA

There is a simple reason for merger and acquisition activity: for many firms, organic growth pales in comparison to acquisitions as a way of building revenue volume.

source: Zayo

That might be especially true if the global telecom industry continues to see slim revenue growth, overall. But something important also might happen: Horizontal acquisitions might offer some opportunity for synergies, but if the acquired assets also have low growth, the acquirer winds up a bigger company, with greater revenue volume, but profit margins that are not changed much.

Earlier waves of acquisitions had a different set of assumptions, including the ability to buy growth. If growth is negligible, then horizontal acquisitions will lift gross revenue, but perhaps not growth.

The signs that horizontal acquisitions are not paying off so well is the present trend where firms divest portions of their businesses that were bought not so long ago. The same might be said for vertical acquisitions that did not supply sufficient revenue growth.

source: STL Partners

That suggests a different path: acquisitions that are vertical, adding new types of assets. Another option is a move into new segments of the value chain beyond connectivity, for example, that offer higher growth rates.

What might become more difficult are horizontal acquisitions that add heft, and possibly cash flow, but not growth. In many cases, that will mean moving out of territory or out of country, if regulators will not allow particular companies to gain more market share in the domestic market.

The point is that though acquisitions will likely continue to be important, it is not so clear that horizontal strategies are going to work as well as they did a couple of decades ago.

PTC Academy Grows to 3 Events in 2019

The 2019 PTC Academy series is ramping up substantially, with not one,  but three events to be held throughout the Asia-Pacific region.

The first PTC Academy course is being held in Bangkok 23-25 September 2019, with the theme Executive Insight for Exceptional Leaders and is open for registration. This course will be closely followed by additional offerings of this theme for classes in Hong Kong and Beijing in December.

PTC Academy events have continued to evolve over the last three years and represent a fantastic opportunity to allow our future leaders the chance to explore what skills they need to develop in leading, managing change, and transitioning to senior leadership roles.

We received fantastic feedback from our most recent event held in Bangkok, not only from those that attended the PTC Academy, but also from their management that sent them – it is seen not only as highly relevant, but also time and cost effective.

The expansion of the PTC Academy into Hong Kong and Beijing is just the first planned phase of extended outreach. Next year, we will look to add India, another option in China, and potentially the Pacific Islands.We encourage senior executives to send their rising stars! If you are already part of the PTC Academy Alumni, please help support this PTC Outreach Initiative by telling your colleagues and management about this year’s exciting course. More details outlining this year’s program can be found here.

U.S. Internet Access Speeds are Climbing Rapidly

U.S. mobile and fixed network speeds are on a rapid climb. In 2018, mobile network speeds increased for all the four leading mobile service providers. AT&T average 4G speeds grew from about 43 Mbps to nearly 70 Mbps, on average. Sprint speeds climbed from less than 40 Mbps to about 65 Mbps.

T-Mobile US speeds were boosted from about 40 Mbps to 51 Mbps, while Verizon speeds were up from about 50 Mbps to 60 Mbps.

source: PCmag

Fixed network speeds speeds are climbing rapidly as well. In 2018 alone, average speeds climbed 36 percent in the U.S. market. In the third quarter of 2018, for example, average downstream speeds were 96 Mbps, upload speeds 33 Mbps.

source: Speedtest

Comcast, the largest U.S. fixed network ISP alone sells gigabit service to 58 million U.S. homes, and says it “has increased speeds 17 times in 17 years and has doubled the capacity of its broadband network every 18 to 24 months.”

Charter, the second-largest U.S. cable operator, sells gigabit service to at least 33 million U.S.homes. Since the footprints of the two firms do not overlap, those two companies alone can provide gigabit service to 91 million U.S. homes, roughly 70 percent of all homes in the United States.

Scaling Up in Video Distribution Now is Risky

Scaling up or out of the video entertainment business is a decision Citi equity analyst Michael Rollins believes Verizon could make if it were to acquire Dish Network.

Ignoring for the moment the mid-band spectrum Verizon would acquire, this latest version of an older story (Verizon “needs” to buy Dish for its spectrum), the thesis runs counter to the general narrative about AT&T’s similar moves in video distribution, where the linear video assets help fuel a move into streaming.

Many observers did not like the AT&T acquisition of DirecTV, as many did not approve of the Time Warner acquisition, either, which positions AT&T with a broader role in the ecosystem most akin to Comcast.

Ignoring for the moment the free cash flow boost provided by both those acquisitions, one objection to the DirecTV purchase was that it represented the acquisition of a company whose product (linear subscription video) is in declining demand.

So the suggestion that Verizon could choose to “scale up” its video subscription footprint by acquiring Dish Network video accounts (though the spectrum holdings arguably are the real prize) would then represent the same sort of bad decision AT&T is reputed to have made.

Verizon has not been keen on an expanded role in consumer video distribution, it is safe to say, in either linear or streaming roles.

And it is arguably a tougher decision now that Netflix has changed the video distribution from a domestic-only to a global business. So now any firm contemplating surviving the eventual consolidation of the U.S.-anchored video streaming business has to decide whether it can gain enough scale to compete with the likes of Netflix, and likely YouTube, Hulu and Amazon.

To be sure, there are a couple different roles. Netflix and Amazon, so far, focus on pre-recorded content. Hulu and YouTube are anchoring their services with live streaming.

It remains unclear which roles Disney will attack, likely some combination of both, as it owns the ESPN live sports franchise plus a deep catalog of movies.

UBS equity analyst John Holulik estimates Disney could get 20-percent to 30-percent take rates from U.S. broadband households by 2024.

The other potential issue is whether success primarily in the U.S. market, or “going global,” is feasible, and a way to remain in the top five or six such services.

For consolidation is inevitable. And all contenders have to factor in how they deal with Netflix, in a multi-subscription market. An April survey from research firm Hub Entertainment Research showed that if consumers had to abandon one streaming service to get Disney+,  44 percent would keep Netflix, while 29 percent said they would keep CBS All Access.

Another survey, by Streaming Observer suggests 60 percent would keep Netflix, while 20 percent would subscribe to both Netflix and Disney+.

source: Streaming Observer

Why Verizon would want to reverse course and get into the crowded streaming field now is unclear. Eventually, consolidation of a few of the leading services seems inevitable, given the presence of brand names such as Netflix, Apple, Disney (ABC, ESPN), YouTube, Amazon, AT&T (Warner Media) and Hulu (Disney) at the top and upper end of the market share ranks, and some others, such as Comcast (NBC Universal), yet to make their moves.

The fate of many smaller services remains quite unclear. To be sure, Verizon eventually could change its mind, but there seems no obvious reason why it has to move now, and whether it has the financial strength to be an acquirer, if it desired to do so.

So scaling “up” in video distribution, from Verizon’s standpoint, seems unlikely. Whether some risky moves will eventually be necessary seems fairly clear, though. With revenue growth rates now very low, Verizon eventually will have to get more aggressive if it wants to boost growth.

Globally, Growth Now is the Issue

The telecom industry has had a historical growth rate of about three percent a year. So growth at rates lower than three percent might well be deemed a problem. According to estimates by STL Partners, only in Africa will growth rates exceed three percent, between 2019 and 2022.

In Europe and Western Europe, growth might well be negative over that period. If telecom service provider costs of capitalare 4.6 percent for debt, and perhaps 10 percent for equity, one-percent revenue growth rates are a key problem.

source: STL Partners

source: STL Partners

One might well argue that capital investment in U.S. fixed networks dropped off sharply in 2000 in large part because such investments no longer were expected to produce revenue growth.

source: Market Realist

Historically, faced with slowing growth, telecom companies have purchased growth by acquiring other firms, in horizontal deals (mobile firms buying other mobile firms; fixed network firms buying other fixed network firms; fixed network entities buying mobile assets; cable firms buying other cable firms).

That will remain an option for some firms. The new problem is that while scale helps with operating costs and gross revenue,  long-term growth might not benefit too much. A bigger firm, growing less than three percent, does not solve the growth problem.  And growth now is the key issue.

Firms might make mistakes when trying to grow outside the connectivity role. But staying exclusively in that role, as a strategy, might also falter, as it does not offer a path to growth.

Open Access to MDU Internal Wiring Sounds Great, Until You Think About the Physical Issues

Lots of problems in the communications business that would seem to be simple are, in fact, often somewhat complicated, and often costly. If you know people who work in outside plant (cable and telco, especially), and you ask about why it is that multiple dwelling units often are the last-wired homes in a city, you are going to get a couple of consistent sets of answers.

Unlike the detached single-family home environment, building owners have the legal right to refuse a service provider’s desire to wire the building. Residential single-family homeowners cannot prevent a service provider from building access plant down the street or alley.

Building owners can, in fact, bar access to an MDU or other large private property. So even if the network runs down the street or alley, the right to access the MDU internal wiring network, building basement, rooftop or other spaces can be denied. Obtaining such rights has to be negotiated building by building, as well.

That is why MDUs often are the last to get any telco or cable service, on a uniform and timely basis, in a city.

To promote competition, the obvious answer for many has been to do an “open access” approach within each building, assuming the building owner agrees, where multiple providers can use the internal wiring.

Sounds reasonable, no? But that is where one has to talk to the outside plant experts. For any sort of voice, video or data network, there always is a network demarcation point of some sort.

Also, it is easy to criticize the Federal Communications Commission for not favoring local laws requiring open access to internal wiring networks, as pro-competitive as that sounds.

There actually are all sorts of reasons having to do with cumbersome interface and cabling issues that creates.

For a single-family, detached home, that is a plastic network interface unit on the side of a house. For an MDU, something more complex is required. Typically, that is some sort of wiring chasis that demultiplexes a signal stream, allowing individual tenants to get access to a service, using the internal riser network.

Sure, in principle one might place multiple interface panels, side by side, in a basement, closet, panel or pedestal. Even assuming security is not an issue (it is), the solution for service to any particular unit within the building would involve running a jumper cable from one interface panel to another panel where the internal wiring all terminates.

If you have talked to people who run data centers--or spent time in such centers--you know the wiring mass can be quite substantial. There is great need for detailed labeling and some method to tidy up the mass of cables.

So picture a basement wall having to support multiple wiring panels, one for cables that terminate in each living unit on every floor, then some way to route jumper cables from each of the separate service provider termination units. Again, ignore the fact that the security of each service providers termination panel has to be provided, but also the ability to physically disable rival provider jumper cables, so that any new provider can connect to the in-building riser network.

Imagine the growing number of abandoned cables that accumulate every time a single customer changes service providers. It is messy and ultimately unworkable.

Probably few of us who are would-be customers like the practice of exclusive contracts on MDU properties. That restricts choice. On the other hand, the physical challenges of allowing multiple suppliers to connect to internal wiring networks is not an easy problem to solve, without creating complicated and bulky equipment issues in whatever space is used for network terminations.

Multiple service providers having access to each and every potential customer location in an MDU sounds reasonable enough. But there are physical constraints, especially over time as more customers move in and out, start and then terminate service, with the old cables being stranded.

To the best of my knowledge, a new service provider is under no legal obligation to remove older cables that had been used by any other service provider. And that means lots of unused, stranded cables that may or may not be marked, take up space and make installation and subsequent repairs more difficult.