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AT&T Transformation Means More Market Competition is Coming

Diversification is a time-tested way for suppliers, investors or buyers to reduce business risk. Diversification also now is a major growth strategy for most service providers.

Consider the significant ways AT&T is about to change, assuming the acquisitions of DirecTV, Iusacell and Nextel Mexico are approved.

Facing huge competition in the U.S. mobile market, AT&T reduces its reliance on U.S. mobile revenues.

In the face of mounting pressure in the U.S. consumer markets, AT&T would–arguably for the first time ever–become a company whose revenues are lead by business customers and services.

Also, AT&T would reduce exposure to declining voice revenue and increase the scale of its video entertainment business, a product segment where telcos are gaining share, rather than losing share.

Where today U.S. mobile operations are the single biggest revenue generator, after the transactions AT&T consumer mobility will be only the third-biggest revenue contributor.

“Our transactions with DIRECTV and Mexican wireless companies Iusacell and Nextel Mexico will make us a very different company, said AT&T CEO, Randall Stephenson. “After we close DIRECTV, our largest revenue stream will come from business-related accounts , followed by U.S. TV and broadband, U.S. consumer mobility and then international mobility and TV.”

Consider the magnitude of the changes. In 2014, AT&T reported earning nearly 60 percent of total revenue from mobile services. AT&T meanwhile earned about a quarter of its revenue from business customers.

Consumer landline revenue was less than 20 percent of total.

Assuming AT&T’s acquisitions of Iusacell, Nextel Mexico and DirecTV are approved, AT&T will earn about 45 percent of total revenue from business customers and about 20 percent from consumer mobility services.

About 30 percent of revenue would be earned from U.S. consumer high speed access and video entertainment.

All of that has key implications. AT&T will reduce reliance on U.S. market revenues. From this point forward, AT&T growth arguably will come from geographic expansion outside the U.S. market.

At the same time, AT&T will reduce its exposure to highly-volatile U.S. consumer fixed line and mobile markets, while increasing the weight of the higher-margin, higher gross revenue business markets.

Video entertainment becomes a much-bigger portion of total revenue. In fact, high speed access plus TV will the second-biggest revenue contributor.

So think about the possible implications. Where will AT&T be willing to invest more, and where will it make sense to invest less? How hard will AT&T fight to protect particular lines of business?

What products will be easier to “merchandise” because profit margins are low, and which will have higher profit margins?

As one might have argued that AT&T has had less and less incentive to invest in its fixed network, given the growth of its mobile services, so now AT&T might have even less long term incentive to invest in the consumer portions of its U.S. fixed network.

That might create new opportunities for domestic competitors, as AT&T and Verizon see the need to “strategically disinvest” in fixed assets, in favor of mobile assets. In AT&T’s case, there now also is the necessity of investing in assets outside the United States.

In other words, AT&T will have diversified its revenue sources towards business, toward video and towards international segments, and conversely away from consumer and domestic.

So some U.S. Internet service providers and some mobile operators might find AT&T more vulnerable in parts of its consumer services portfolio.

At the same time, AT&T might be more inclined to allow competitors to take consumer market share, especially at the low end, since AT&T will be more focused on global and business revenue sources.

AT&T’s moves are part of a diversification pattern happening elsewhere, and for obvious reasons.

“Overall, growth in telecom revenue continues to slow in every geographic region,” according to Stéphane Téral, Infonetics Research principal analyst. That puts a premium on discovery of brand new revenue sources, geographic expansion and product line expansion.

Europe’s five largest service providers—Deutsche Telekom, Orange, Telecom Italia, Telefónica, and Vodafone—continue to experience declining revenue, though less pronounced than in the past three years, he noted.

Global mobile service revenue barely budged in the first half of 2014, up just 0.5 percent from the same period a year ago, Infonetics says.

But mobile data services (text messaging and mobile broadband) rose in every region in the first half, driven by the increasing usage of smartphones. The obvious corollary is that voice revenues have fallen nearly as much as mobile data revenues have grown.

Mobile broadband services grew 26 percent year-over-year, enough to offset the decline of text message revenue declines, Infonetics reported. On the other hand, that sometimes was not enough to offset losses of voice revenue.

In Latin America, mobile data will not replace lost voice revenues. Orange voice revenue declined 3.3 percent in 2014. In Japan, DoCoMo says a change in voice tariffs might mean NTT does not make money on voice until 2017.

High speed access revenue still drives growth in mobile and fixed line segments, but revenue will “begin to stabilize” between 2015 and 2016, if “our competitors behave, said Ramon Fernandez, Orange CFO.

Vodafone now is focusing on fixed network broadband for revenue growth, as its mobile business is declining.

The larger point is that diversification moves are going to continue, allowing many service providers to recast themselves.

At the same time, that is going to create new space for competitors to enter markets where leaders are less likely to put up as stiff a fight as they might have in the past.

Ironically, as competition grows in US. consumer services, at least some major contestants, including AT&T, are essentially redeploying effort and capital away from the fight.

That means market share shifts are going to accelerate in U.S. consumer markets.

“Sustainability” is the New Telco Challenge, Globally

“Sustainability” was not an issue in the old monopoly telecommunications world. With profits guaranteed by “rate of return” regulations, service providers literally could not lose money, and also were guaranteed a fixed rate of return on invested capital.

Also, in many cases, since the firms were directly owned by national governments, there was an implied financial backstop provided by the national government, as well.

All that has changed as firms have been privatized and deregulated, exposing all the former incumbents to market pressures and the risk of failure. Now, sustainability–the ability to stay in business–is everything.

Virtually every legacy service faces product maturation, product substitutes are more plentiful than ever and new competition is growing. Ignoring for the moment the issues of product maturation and product substitutes, the amount of competition is growing.

In the U.S. market, Cablevision Systems Corp. has launched the first-ever mobile service based exclusively on the use of Wi-Fi access. That s a challenge to the notion that a “mobile network” is required to provide mobile services.

At the same time, in the midst of a mobile marketing war, additional competitors might be coming.

Google is starting a mobile service of its own, Dish Network either will enter the market or sell its spectrum holdings and Comcast likewise is preparing its own future mobile operation.

Dish Network bid $13.3 billion to buy AWS-3 spectrum (but might have to pay only about $10 billion), adding to prior spectrum holdings ostensibly amassed to build a new Long Term Evolution mobile network.

By some estimates, Dish Network’s mobile spectrum is worth perhaps $20 billion.

The issue now becomes whether Dish Network will commit to building a new mobile network, or will sell the spectrum rights to another company.

The point is that three additional national contestants might become part of the U.S. mobile market. The implications for gross revenue and profit margins of existing suppliers is not hard to imagine.

But changes also are coming in many other markets. In Europe, there is a present trend towards mobile consolidation and triple-play or quadruple-play offers made possible by ownership of both fixed and mobile assets.

That could relieve some competitive pressure in the short term. Oddly enough, the long term outcome could well be more competition, not less.

It is possible that a smaller number of stronger contestants will lead to a greater ability to compete, long term, raising gross revenues and profit margins enough to entice new players into the market. We sometimes forget that vicious competition and low profit margins are a deterrent to new entrants.

Bigger revenue opportunities and better profit margins will tempt new providers to enter a market.

Globally, even if the expectation is that mobile service providers are best positioned to provide Internet access to new customers, two big groups of investors are planning to launch new satellite constellations to provide Internet access to billions of potential new customers.

As skeptical as some might be, the new constants include Elon Musk and Richard Branson, plus Google and entrepreneur Greg Wyler, using new launch technologies and architectures that will increase capacity and make possible lower costs than possible using a geostationary satellite approach.

The biggest change is the use of low earth orbit for the new fleets. That implies much-larger numbers of satellites, but also using new, lower-cost technology, with much-higher capacity (the analogy is small cells used in a mobile network).

The LEO approach is not a new idea. But history is why some might be skeptical.

Iridium, which lost perhaps $5 billion, was among the biggest failures in the low earth orbit satellite communications business. Teledesic arguably lost less, because it failed earlier. And then there was Globalstar. And ICO. And Orbcomm.

But Thuraya succeeded.

So can Elon Musk, Richard Branson and Greg Wyler successfully create two new satellite communication networks that are sustainable? Some might argue the odds are far better, and for the same reason the odds of creating a successful application startup are higher than 15 years ago.

The information technology components of the business arguably are an order of magnitude lower.

And both the WorldVu Satellites and SpaceX ventures have access to backers who have their own launch technology, likewise with launch cost profiles substantially lower than what has been possible in the past.

All the contestants–legacy and upstart–will face sustainability issues. For incumbents, the issue is how to survive markets becoming more competitive.

For upstarts, the issue is whether the new platforms–even when using new lower-cost approaches–can attract enough consumers to achieve cash flow and profits large enough to keep them in business.

Nothing can be taken for granted in such scenarios.

Cablevision Launches “Wi-Fi Only” Mobile Service: Big Test of Rival Platform

How big is the market for Wi-Fi-only smartphone service? We are about to find out, as Cablevision Systems, the U.S. cable operator based on Long Island, New York, has launched Freewheel.

The new Wi-Fi-only mobile service will provide a real-world test of a theory, speculated about for a couple of decades, that Wi-Fi can be a full substitute for a mobile network, at least for some customers, with some use cases.

Nobody seems to doubt that Wi-Fi access is, and can be, a huge part of the smartphone access infrastructure.

Fully 80 percent of all global Internet traffic now is generated by smartphones and untethered devices. Fully 66 percent of all mobile device data consumed uses Wi-Fi as the connection, and the percentage will keep growing, Cisco predicts.

But the “Wi-Fi only” approach to mobile device access will test the degree of demand for a service that has no ability to use the mobile network.

That mimics, in many ways, the way most tablet users gain Internet access, and will test the ability for a new platform to compete directly with mobile operators.

The big drawback will be the lack of ubiquitous access, the key feature of traditional mobile service. Even if the majority of device use now occurs in Wi-Fi zones, the ability to connect from anywhere, on the go,  remains the unique value of mobile service.

So the new value proposition to be tested is whether a “works sometimes” approach, priced right, will appeal to a big segment of the “works everywhere” market.

Right now, nobody knows. To be sure there are some advantages Cablevision will build upon, including the consumer tendency to buy a triple play, quadruple play or multiple-user service plan. The majority of consumers buy their fixed network services in a bundle, and most mobile accounts also are purchased on multi-user plans.

That might especially be true for present buyers of Cablevision high speed access, who can get the new service for $10 a month. As a relatively small incremental cost item, one might argue the biggest single group of users will be high speed access customers who want a low-cost mostly-mobile smartphone service to be used locally.

Some might argue a classic disruptive attack is underway.

Often, attackers enter the market with products that are “not fully featured.” Offered at significantly lower prices, the value proposition trades functionality for cost. Recall the way MCI entered the long distance voice market, the way Skype entered the voice calling market, or the way WhatsApp entered the messaging market.

In each case, observers could well have noted functionality, quality or feature limitations of the attacking service. But, over a period of time, features, functionality and quality increased.

That might well be the thinking behind Freewheel. Whatever the present limitations, all that will change within a decade, and in the meantime Cablevision will have built a brand, customer base and revenue stream that can grow into the new market.

At the same time, Freewheel gives Cablevision a quadruple play offering including mobile service, even if there are some limitations. Right now, there is just one handset available, and there is no fallback to mobile service when Wi-Fi access is unavailable.

The upside is unlimited use and a $10 a month recurring service charge. But Cablevision reasonably might expect that this classic “attack from the bottom” would be followed by an expected development of the service to mirror the quality and features of a standard nationwide mobile service.

At the same time, the number of scenarios under which “Wi-Fi only” makes sense are growing.

In addition to Cablevision’s Freewheel, Spectra Wireless, an African Internet service provider, uses Wi-Fi as the only connectivity mechanism, if primarily because it is an education-focused ISP primarily serving campus locations, for the moment

Spectra Wireless also is the first company in Africa to offer a consumer Internet access service leveraging TV white space technology, as well.

So we now get an enlightening test of how well Wi-Fi can become a mobile services platform, not as a complement, but as an alternative.

Moore’s Law Underpinned Huge Gambles in Video Business

Moore’s Law arguably has underpinned business models across the computing, software, consumer electronics and communications industries for decades. Despite concerns that Moore’s Law–the observation that transistor density doubles about every 18 months–would cease to operate at some point, so far that concern has been misplaced.

Reed Hastings is among CEOs who recently have relied on a continuation of Moore’s Law as the underpinning of a radical change in strategy, shifting from shipping DVDs using the postal service to streaming.

As logical as that decision might seem in retrospect, it was a gamble. Hastings had gambled before. Not many recall that the original Netflix business entailed selling DVDs.

When Netflix was launched in 1998, “I would guess that 95 perent of our revenues were coming from the sales of DVDs ,” said Marc Randolph, former Netflix CEO.

But Netflix already could see a major change was needed. “it was obvious to us that this was not a sustainable business,” said Randolph. “It was inevitable that at some point in the near future we would have Amazon entering the DVD business.” And Walmart and other mass market retailers.

“All of which would have crushed our margins and slowly but surely driven us out of business,” said Randolph. And remember, in switching to DVD rentals, Netflix sacrificed 95 percent of its revenue.

The decision to focus on streaming also was a gamble. In 1998, some argue, it would have cost Netflix as much as $270 to stream a single movie. By 2010 it might have cost about five cents for Netflix to stream a movie of equivalent image quality.

That is why DVDs by mail was necessary. Netflix could not build a business on streaming. But Hastings considered Moore’s Law.

“We took out our spreadsheets and we figured we’d get 14 Mbps to the home by 2012, which turns out is about what we will get,” said Hastings. “If you drag it out to 2021, we will all have a gigabit to the home.” That meant streaming delivery was indeed possible.

Nor is that the first time a major video innovation was built on assumptions about Moore’s Law.

Back in the mid-1980s, when standards for high-definition TV were being debated, the lead proposals were for hybrid analog-digital systems, using as much as 45 MHz of spectrum, where standard television used 6-MHz channels.

Tom Elliot, former Tele-Communications Inc. SVP, recalls the potential disruption of the cable TV business model. Elliot estimated at the time that it would take 15 years to recover the investment in early proposed hybrid versions of high definition TV.

The problem, as Elliot saw it, was that the hybrid system would in turn soon be eclipsed by all-digital TV, requiring two major generations of investments inside of 15 years.

Elliot recalls TCI SVP John Sie coming into his office and asking how the company could avoid being “run over” by broadcasters and consumer electronics firms. Elliot recalls arguing that Moore’s Law would hold, though many at the time argued progress was about to flatten.

So the big gamble was on Moore’s Law. If the law held, then it would be only a matter of time before decoders roughly corresponding to a “mainframe in the living room” could be built for consumers.

That amount of processing power would allow an all-digital signal representing perhaps 100 MHz of raw, uncompressed video to be encoded, and then decoded on the fly, by a consumer terminal the industry could afford. Virtually nobody thought that was feasible.

The big gamble was Moore’s Law holding, allowing both low-cost decoding and use of standard 6-NHz TV channels.

Almost nobody but Elliot, and later TCI,  actually thought it could be done. He recalls that position as being “really lonely.”

But Elliot knew Moore’s Law. He had talked to clean room techs. Yield might be an issue initially, but if Moore’s Law held, an affordable set-too was economically possible, even if–at the time–that required the equivalent of a mainframe in the livingroom.

Elliot was proven right, as controversial as the call was at the time.

So Moore’s Law has been the foundation for transformative business decisions more than once.

TCI gambled its future on digital TV built on Moore’s Law.  Netflix likewise gambled its business on access bandwidth. Both were bold, dangerous business decisions, built on assumptions about Moore’s Law continuing to operate.

What is the Most-Important Big New Opportunity for Telcos?

If you had to make a bet, right now, about the most-promising big opportunity for tier-one telecom providers–something big enough to replace about half of all current revenue over about a decade–what would you choose?

The decision matters. With fixed and mobile revenue slowing, flat or declining, the “next big thing” will matter. To be sure, there are lots of smaller and important things to be done.

But nothing might matter more than discovering big new markets and services to drive growth beyond today’s leaders. After all, the industry already has watched revenue leadership shift from fixed voice to mobile and voice to data. Video services will help, in some cases. Expansion out of market will help as well.

But organic growth still has to hinge on a new wave of services yet to be created, even if out of region expansion, video or fixed-mobile integration also drive additional revenues.

Right now, it would be hard to name a category of services with more potential than Internet of Things, as fuzzy as that concept might be, since IoT represents many potential new markets and services.

With the Internet of Things at the peak of its hype cycle, we will all be hearing predictions of non-linear growth. Many forecasts, for example, call for deployment of 20 billion or 30 billion IoT units by 2020. That implies potential new Internet connections of as much as the same number.

A few years ago, some analysts had predicted that, by 2020, the market for connected devices would be between 50 billion and 100 billion units. The point is that projections already have proven too optimistic.

None of that is at all unusual. Big new business opportunities are tough to pin down, in terms of concrete business models. Think of the Internet itself. In mobile, creation of sizable and concrete 3G and 4G revenue models took time.

But IoT remains in an early stage. For example, a recent survey of executives found they lack a clear perspective on the concrete IoT business opportunities, as promising as the field might be.

Semiconductor executives surveyed in June 2014 by McKinsey said the Internet of Things will be the most important source of growth for them over the next several years—more important, for example, than trends in wireless computing or big data.

Those hopes might be misplaced, though. “For players in the traditional semiconductor market, the Internet of Things may spark some growth, but it certainly will not change two percent industry growth today to the 10 to 15 percent growth we had in the 1980s,” one industry executive says.

If so, that might imply that hopes for massive new service provider revenues might also be excessively optimistic, at the moment. Whether that also means service provider hopes are misplaced is the issue.

Important innovations in the communications business often seem to have far less market impact than expected, early on.

Even really important and fundamental technology innovations (steam engine, electricity, automobile, personal computer, World Wide Web) can take much longer than expected to produce measurable changes.

Quite often, there is a long period of small, incremental changes, then an inflection point, and then the whole market is transformed relatively quickly, but only after a long period of incremental growth.

Mobile phones and broadband are among the two best examples. Until the early 1990s, few people actually used mobile phones, as odd as that seems now.

Not until about 2006 did 10 percent of people actually use 3G. But mobiles relatively suddenly became the primary way people globally make phone calls and arguably also have become the primary way most people use the Internet, in term of instances of use, if not volume of use.

Prior to the mobile phone revolution, policy makers really could not figure out how to provide affordable phone service to billions of people who had “never made a phone call.”

IoT might prove to mimic that pattern. And that is the optimistic scenario. Not all innovations prove to have such impact.

Still, the reason the industry needs to create viable and big business models around IoT is that it now is the single best hope for replacing about a quarter of all current revenues.

We might reasonably expect video entertainment, mobile data and out or market expansion to produce additional revenue representing about a quarter of the size of existing firm activity.

The issue there is that some of those gains are “zero sum.” Gains by one contestant come only at the expense of another contestant, and do not represent net market growth. IoT is among the few big new revenue sources that actually grow the market.

And that is why IoT reall matters, for service providers and many others.