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Top 10 Events of the First Quarter- Part 1

portfolio.logos_.inauthEnd of quarter greetings from Austin and Dallas, Texas.  These next two weeks, we’ll recap the quarter with a quick spin through ten events that will influence telecom earnings calls throughout the year.  Thanks to several of you who sent in your own nominations.

 

Prior to digging into the list, a very brief shout out to Los Angeles-based InAuth, one of the leading mobile counter-fraud detection and predictive activity engines for the financial services industry.  They announced a $20 million raise from Bain Capital Ventures this week.  InAuth’s CEO, Mike Patterson (no relation), is the former founder of Smobile Systems which was acquired by Juniper in 2010.  While they are not a client, their former CFO, Paul Garrett, is a friend and fellow reader of this column.

 

Top 10 Events of the First Quarter – Part 1 (in no particular order)

The first quarter of 2014 was one where there were 20-25 events competing for a top spot. While there have been many noteworthy events this quarter, it’s remarkably quieter than last year (we welcome your thoughts on why).  Here’s our take on the most impactful events in no particular order:

 

  1. Sling TV announced at Consumer Electronics Show – 4 Jan 2015; launched 9 Feb 2015.

 

sling TV current offering$20 for ESPN, CNN, A&E, AMC, HGTV, TNT, TBS, History Channel, Travel Channel, Cartoon Network and more.  Low-priced add-ons to customize your TV experience (including $5 for SEC Channel, ESPN News, ESPN U, Univision Deportes, beIN networks, and more).  100,000 signups, according to Re/Code.  Full compatibility with Amazon Fire TV, Roku, and Microsoft XBox One platforms (Google Nexus Player coming soon; no Sony PS3/ PS4 platforms due to their competing Playstation Vue product launched on March 18).  Decent reviews (read this one from TechHive) indicate Sling still has a ways to go on user interface but that everyone in the tech media community is rooting for them.  A late quarter addition of AMC and A&E may have impacted initial sales.  The $20 price point is very attractive as it’s close to the price of leasing an additional set top box for another room in your house.  Bottom line:  Big idea, decent implementation, amazing use of the existing Hopper and Sling infrastructure.  Sony and Apple have real competition.

 

  1. (and 3) The FCC AWS Auction 97 ends, and Verizon sells off more of its local properties (29 January and 5 February). $44.9 billion is a lot to pay for spectrum, especially when most pundits were predicting that winning bids would only fetch $20 billion.  AT&T bid extremely aggressively (to the tune of $18.2 billion), and Dish Networks (independent of 3rd parties) also was a surprise winner in many metropolitan locations with $10 billion in wins including 15 MHz of unpaired spectrum (although not without some criticism of their partnering strategy.  See more in this Wall Street Journal article).  This prompted aggressive courting from T-Mobile ($1.8 billion in wins) who suggested at Deutsche Telekom’s Investor Day the “Dish and we [T-Mobile] makes some sense… from the standpoint of integrating that spectrum and capability and deploying it at our network.”   From the attached map (courtesy of Wiley Rain), the most coveted 10 MHz J Block of spectrum was divided pretty evenly between AT&T (blue in map) and Verizon (red). However, Dish and T-Mobile won larger portions of the country in the G, H, and I spectrum blocks, and Dish won the A1 and B1 unpaired spectrum blocks across most of the country.

auction 97 results - J blockThe larger than expected price tag led Verizon to more aggressively jettison their local exchange presence in California, Florida, and Texas for $10.54 billion (see Frontier’s announcement here).  This represents approximately 3.7x 2014 estimated EBITDA and 1.8x 2014 actual revenues.  Most importantly, these markets contain 1.2 million FiOS video subscribers, or about 21% of the total FiOS video franchise (54% of the assets they acquired were FiOS enabled).

 

This left many (including me) scratching our heads.  How will Verizon increase the profitability of the Verizon video franchise if it continues to descale the business (programming costs are highly dependent on viewership)?  Will this have a negative effect on Verizon’s ability to compete in the enterprise space in these markets (Tampa, Dallas/ Ft Worth, and Los Angeles)?

 

 

  1. The Apple Watch launch date and features disclosed (9 Mar 2015; launching 22 April 2015).

 

apple watchAs many of you reminded me this week, the Apple Watch was technically introduced in their September 9 announcement.  But few saw a $10,000 watch coming (and sharing the stage with a $350 brand).  Can Apple quickly gain share in all parts of the wearables spectrum?  How will wireless carriers (no separate radio means no gross add) and Best Buy distribute this product (which will undoubtedly sit side by side with Samsung and other models)?  How will applications be redefined as a result of Apple’s bold push into tiny screens?  Bottom line:  Extremely effective advertising (if you have been watching college basketball, you have seen the ad), and heavy developer support mean that Apple’s launch will be a screaming success (especially at the highest end which will undoubtedly sell out).  The Apple Watch’s magnetic charging mechanism is also a lot better than alternatives.  The watch needs to have staying power, and that only comes with a lower price.  It will be very interesting to see how Cupertino solves that equation.

 

  1. Samsung Galaxy Note 6/ 6 Edge introduction (1 Mar 2015 unbox event; pre-orders 27 Mar; first phone shipped in early April). It’s amazing what an aluminum alloy body will do for first impressions of a Samsung Galaxy phone.  “Samsung, reborn” are the first words from the CNET review.  “Welcome back, Samsung” from Mashable as they proclaim the Galaxy S6 the Android “Phone of the Year.”  A non-replaceable battery and no micro-SD card capabilities have many crying foul, until they see the super-fast charging capabilities (10 minutes of charging time for 2 hours of video playback) and 32GB baseline capability (for the same price as Apple’s iPhone 6).  There’s no waterproofing, but then again, there’s no annoying charging cover to close (and eventually rip off) as the Galaxy S5 has.  Super changes to phone capabilities including improved optical image stabilization and f-stop.  T-Mobile took Galaxy S6 promotion to a new level with 12-months of free Netflix for all pre-orders, and Sprint is discounting the phone charges to free with the purchase of an $80 unlimited plan.  Bottom line:  Good reviews influence early adoption, and the wireless carriers appear to be solidly behind promotion.  This is going to be a very good selling phone for Samsung (and Google Chromecast).  Next up:  a better tablet.

 

The remaining Top 10 will be published on Good Friday in order to allow for a break for the Easter holiday (and to not jinx the opportunity for someone to make headlines over the next week) .  You can get some idea of where we are headed later this week by reading here, here, here, and here.  And yes, we will likely cover some element of the Open Order later on this week.  On April 12, we will resume our normal Sunday Brief schedule with our first quarter preview issue.  Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to sundaybrief@gmail.com and we’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).

 

Thanks again for your readership, and have a terrific week!

T-Mobile Means Business

Greetings from Las Vegas (site of this year’s Channel Partners Conference and Expo) and Dallas.    This week, we will cover T-Mobile’s latest Un-carrier move which focused on business offerings as well as the latest developments in Over the Top programming development.

 

T-Mobile Means Business

t-mobile summaryThroughout the course of telecommunications history, the pricing alchemy between business and consumer plans has been convoluted at best, and perverted at worst.  This started with landline (voice) pricing in the previous century, and continues today with wireless and broadband rates.  Individuals communicating/ browsing/ messaging over the same iPhone/ Android and surfing the same website pay more, on average, through their business than if they had purchased a consumer plan and been reimbursed.

 

For example, through Sprint, consumers can receive 4 GB of shared data with unlimited talk and text for each line for $140 (or $130 with the 8GB promotion currently offered).  If those four data sharers are actually four employees in a business, that rate jumps to $160 (see here and here for rate cards).  There may be an occasional exception to this rule, but, in general, business customers pay more for the same services than consumers.

 

T-Mobile’s announcement (see here) changes that equation significantly.  For $160, businesses receive 10 lines of service with unlimited talk and text and each line receives 1 GB of data (for those of you who do not follow T-Mobile’s pricing structure, this is a less expensive version of their 4 lines for $100 family plan).  Employees who use higher amounts of data can upgrade to an unlimited plan for an additional $30/ month.  Also, as shown above, businesses can pool data starting at $475/ mo. for 100 GB (note: while Sprint’s 100GB pooled data rate is 30% cheaper at $330, their $35 line fee for unlimited talk and text results in a higher overall price than T-Mobile for a 10 line business).

 

What’s most interesting about T-Mobile’s pricing structure is that it is most attractive to lower (1 GB/ month) data users.  This makes sense, as business web browsing, picture sharing and email access should result in less data usage than Netflix-hungry consumers.  How T-Mobile competitively positions their baseline offer, however, will be critical to their success.

 

The real kicker of the T-Mobile plan, however, is the linkage they have created between business and consumer plans (see here for the full details).  Every business wireless subscriber to the plans described above counts as the first line in a corresponding T-Mobile family plan.  That linkage is the real disruption in Wednesday’s announcement.  For example, if Mom has a business line through work, the remaining three family members would be priced at $30, $10, and $10/ month.  The same data upgrades per line would apply ($10 to 3GB, $20 to 5GB, $30 to unlimited).  This has an obvious effect on acquisition ARPUs in consumer if the employee plans are successful (T-Mobile did not explain how current subscribers could convert into this new plan so the effect on existing ARPUs is not known).

 

Bottom line:  T-Mobile’s new business plans are going to be very effective, not only for businesses but for their employees.  Given renewal cycles, the effect on quarterly gross and net additions will likely be steady (as opposed to sudden).  The depth of Un-carrier 9.0 will directly depend on their distribution strategy.

 

Will Showtime, HBO, and Others Get Fast Lanes? 

In this week’s Wall Street Journal (article here), an interesting article appeared detailing negotiations that have been occurring between several video streaming service providers (including Apple, HBO, Cinemax, Sony) and broadband providers (including Comcast).

 

Specifically cited in the article is the theory that each of these OTT services could be classified as a “managed service.”  Julius Genachowski, who preceded Tom Wheeler as the FCC Chairman, described his view of managed services as follows in a 2009 Brookings Institution speech (full text can be accessed through this link):

 

genachowski brookings instituteI also recognize that there may be benefits to innovation and investment of broadband providers offering managed services in limited circumstances. These services are different than traditional broadband Internet access, and some have argued they should be analyzed under a different framework. I believe such services can supplement — but must not supplant — free and open Internet access, and that we must ensure that ample bandwidth exists for all Internet users and innovators. In the rulemaking process I will discuss in a moment, we will carefully consider how to approach the question of managed services in a way that maximizes the innovation and investment necessary for a robust and thriving Internet.

 

The Journal (and subsequent news publications who did follow-up stories on the topic) did not go into the details of a possible agreement, but describe that managed services could be a component of a larger and more complex deal (which may or may not involve revenue sharing between broadband providers and video streaming companies).  What is clear is that data consumed through these services would not be included in any caps (which we cited as an inevitable outcome in a previous Sunday Brief).

 

Needless to say, this article left many net neutrality advocates confused and upset.  If paid prioritization was a bright line topic, how could Apple, Sony, and HBO get special treatment?  One possible answer:  According to reports, Comcast will make any managed service offering equally available to any company, so pricing could be transparent and “special treatment” wouldn’t be that special.

 

As of Sunday, the FCC has yet to comment on this report or provide greater definition of managed services, but the Open Order clearly outlines that there will be a review of all bandwidth  management processes.  How they rule on this matter could determine the future of streaming video.

 

New York Punts (Again) on the Comcast/ Time Warner Cable Merger

logo-ny-public-service-commA few weeks back, we penned an article proffering that if California could not kill the Comcast/ Time Warner merger, New York would certainly take a swing. (Note:  While Comcast has a small amount of customers in New York today, nearly 9% of the combined company’s customers would reside in the Empire state).

 

Everyone was hoping that some type of resolution would come in the March 18 Public Service Commission meeting (the fourth rescheduled ruling date).  The Albany Times-Union reported that the Commission had come up with specific “benefits” totaling $300 million.  However, the PSC decided to punt their decision to the April 20 meeting.

 

As we mentioned in a previous Sunday Brief, April is a critical month for the Comcast/ Time Warner Cable merger.  The Open Internet Order is behind the FCC (except for Comcast’s inevitable court challenge), the Department of Justice should soon have a new Attorney General, and April will mark 14 months since the merger was originally announced.   Something’s got to give.

 

For some of the “benefit” ideas that were offered to the PSC, click here for Ars Technica’s article on New York City’s public advocate Letitia James.  Her ideas make California’s merger conditions almost look reasonable.

 

Next week we will cover the Top 10 events that shaped the first quarter (nominations welcome).  Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to sundaybrief@gmail.com and we’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).

 

Thanks again for your readership, and have a terrific week!

First Thoughts on the FCC Report and Order (Spring Break Edition)

lead pic (5)Greetings from Seattle, Kansas City, and Dallas, the site of Jesuit College Prep’s 16th Annual Rugby Tournament (pictured).  Given the requirements of the week (and specifically this weekend where I am serving as a field warren), this week’s Sunday Brief will be significantly shorter than previous editions.

 

Many thanks to those of you who participated in the Recon Analytics call last Monday on Auction 97 and the Open Internet Order.  I received several comments from you about using a golf analogy on the call (which most of you know I like to play but have neither the patience nor the talent to play).  Sometimes the best analogies come from experience, and perhaps I have, like the FCC, tried to use a five iron to complete a shot that was meant for much lighter club.  The full replay of the call (thanks again to Roger Entner for putting it together) is here.

iposiBefore diving into the FCC Report and Order, a quick shout out to Boulder-based iPosi, one of my clients who is leading the way with innovative in-building location services.  They have come from nowhere to be a meaningful competitive alternative to NextNav, True Position, and other more expensive and complex in-building solutions.  This week, they were named to ABI Research’s “Hot Tech Innovators” list, which includes a broad range of companies (EyeVerify, CloudOn, Lyft, Smartbin, Zwipe, others).  ABI concludes their section on iPosi with “The company still has a strong play in the timing and synchronization market, but the combination of E911 and new network rollouts could transform the company into a major location player.”

 

The Report and Order That Wasn’t

On Thursday afternoon, the FCC released the 400-page Open Internet Report & Order.  Think of this as Part One of a dramatic miniseries on Internet regulation (e.g., “Winds of War”, “War and Remembrance”) which you would prefer to turn off after the first hour but are forced to watch nonetheless.

 

While some have rushed to proclaim this to be a bipartisan regulatory victory, most analysts yawned when they read the Order’s provisions.  For example, on interconnection, here is the key finding in paragraph 203 of the Report and Order (footnotes removed):

 

At this time, we believe that a case-by-case approach is appropriate regarding Internet traffic exchange arrangements between broadband Internet access service providers and edge providers or intermediaries—an area that historically has functioned without significant Commission oversight.  Given the constantly evolving market for Internet traffic exchange, we conclude that at this time it would be difficult to predict what new arrangements will arise to serve consumers’ and edge providers’ needs going forward, as usage patterns, content offerings, and capacity requirements continue to evolve. Thus, we will rely on the regulatory backstop prohibiting common carriers from engaging in unjust and unreasonable practices.

 

So much for an interconnection “bright line” to create certainty (or, in a more cynical light, so much for the commercial agreement process if the FCC is opening up a new interconnection “appeals court”).  What the FCC should do is establish a rule saying “if a content provider streams more than X Gigbytes of content per day to any specific location, they need to place their content within Y kilometers of the interconnection point.”  This would establish local peering points which are sorely needed (see the EdgeConneX website for more information on how this is occurring without FCC intervention today).  This would benefit backhaul and interconnection providers alike.

 

The most intriguing paragraph in my first read of the Report & Order is 391 (emphasis added):

 

Today, consistent with our authority under the Act, and with the Commission’s previous recognition that the “public switched network” will grow and change over time, we update the definition of public switched network to reflect current technology. Specifically, we revise the definition of “public switched network” to mean “the network that includes any common carrier switched network, whether by wire or radio, including local exchange carriers, interexchange carriers, and mobile service providers, that use[s] the North American Numbering Plan, or public IP addresses, in connection with the provision of switched services.” This definition reflects the emergence and growth of packet switched Internet Protocol-based networks. Revising the definition of public switched network to include networks that use standardized addressing identifiers other than NANP numbers for routing of packets recognizes that today’s broadband Internet access networks use their own unique addressing identifier, IP addresses, to give users a universally recognized format for sending and receiving messages across the country and worldwide. We find that mobile broadband Internet access service is interconnected with the “public switched network” as we define it today and is therefore an interconnected service.

 

This paragraph makes a lot of sense.  Facebook uses IP addresses for Messenger.  Apple’s messaging product uses public IP addresses (and FaceTime allows telephony integration already).  So does Google.  All three of these network service providers (check out their capital spending levels in their recently filed annual reports to see how much they are spending) should be required to interconnect with all other elements of the public switched network, whether that’s FaceTime with Cortana (see here for Cortana’s recent foray into Apple products) or Hangouts with Join.me, Microsoft Lynx, or Citrix’s GoTo Meeting.

 

Required communication applications interconnection is an intended result of the Report and Order.  It’s going to create more expensive and complex communications services, and break apart Apple’s “closed system” development process.

 

Bottom line:  In a legacy-driven attempt to solve problems with redefinition and case-by-case studies, the FCC has inserted itself as judge and jury over the Internet.  Within months, the 400-page Order will bloom into 4,000 pages of new opinions, precedents, and “hey, we should have thought about that” waivers.  Apple, Google, Microsoft, and Facebook will bear as much of the regulatory burden as AT&T, Comcast or Verizon.

 

Next week we will cover T-Mobile’s business announcement (March 18) and also see if/how the New York State PUC tries to “one up” their regulatory bretheren in California on the Comcast-Time Warner Cable merger.  We’ll also have some initial comments on first quarter drivers.  Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to sundaybrief@gmail.com and we’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).

 

Thanks again for your readership, and have a terrific week!

Did California Kill the Comcast/ Time Warner Cable Merger?

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Greetings from Seattle (pictured), Dallas, and Nashville.  This has been a week filled with news (Mobile World Congress, analyst conferences, and the normal course of business) and regulatory conjecture.  I have decided to stop trying to figure out what fine-tuning the Commission is doing between the vote last month and the final release of the Report and Order.  They issued a blog post on Tuesday (see here) trying to explain the lag and it only raised more questions with analysts and media alike.

One novel idea I think the FCC should consider is to follow the lead of Unfinished Business, a popular movie currently in vince vaughantheaters, and offer free photo stock for all communications services providers to insert into their PowerPoint presentations (see Vince Vaughn example here and at right).  Imagine a presentation on sponsored data with Commissioner Clyburn showing a quizzical (or downright skeptical) look, a thumbs up from Commissioner Wheeler, or the disapproving furrowed brow of Commissioner O’Rielly.  It would bring some fun back into board rooms everywhere.

When is a Cable Provider Not a Cable Provider?  Cox’s Answer Below

Before moving on to Comcast news, there is one new regulatory item worth mentioning (and those of you who peruse my LinkedIn feed already saw my thoughts on the topic Friday).  Cox Communications, the perennial winner of “good guys of cable” award (not to mention that they have been the breeding ground for both Comcast’s and Time Warner Cable’s commercial services business unit presidents) took to the mediasphere excoriating the FCC for their nuanced definition of a “cable company.”

At issue is a Notice of Proposed Rulemaking (NPRM) issued by the FCC in late December designed to make it easier for Over the Top (OTT) providers to broaden their content lineups by classifying themselves as Multichannel Video Programming Distributors (MVPDs).  Currently, unless the provider actually controls the transmission layer, content companies and cable (sports, news) programming divisions do not have to engage in retransmission discussions.

Not surprisingly, Cox takes the position that the Commission should continue with their current definition of “channel” which was reaffirmed in 2010 and 2012 (MVPD rights would only extend if the OTT provider also controlled the transmission path).  This would eliminate many competitors who seem to be thriving without offering local broadcast content (see here for SlingTV’s latest subscriber estimates from Re/code).

But Cox goes further, imploring the FCC to confirm and enforce the classification of AT&T U-Verse and Google Fiber as cable companies.  Cox succinctly lays out their argument to the FCC as follows:

Just as the interests in avoiding competitive distortions warrant establishing a level playing field for all MVPDs if OTT providers are deemed MVPDs, they likewise justify Commission action to ensure that all entities that meet the definition of “cable operator” under the Communications Act—including self-styled “IPTV” providers such as AT&T and Google Fiber—comply with the duties attendant to that classification. The NPRM appropriately proposes to clarify that cable operators’ provision of managed IP-based services over their cable systems does not alter the classification of such offerings as “cable services” under the Act, and that, by contrast, OTT services are not cable services regardless of whether they are provided by a new entrant or traditional cable operator. But the NPRM fails to call out that its analysis of IP based video services undercuts the strained efforts of AT&T and Google Fiber to maintain that their IP cable services are somehow exempt from cable regulation. Such claims have no legal or factual basis, as the NPRM implicitly recognizes. The Commission should make that understanding explicit and should not permit video distributors to flout their duties under Title VI.

Frankly, I had no idea that Google and U-Verse sought to designate themselves as something other than cable companies.  They market themselves as an alternative to cable company video programming (unlike SlingTV).  They compare their channel line-ups to the incumbent cable company in their promotional material.  And they package and price their services using tiered and premium structures straight out of the cable playbook.  So if AT&T and Google swim, walk, and quack like a cable duck, aren’t they cable providers?  Kudos to my friends at Cox for publicly discussing this issue and exposing the unique regulatory interpretations of their competitors.

California May Have Killed the Comcast/ Time Warner Cable Merger

comcast-time-warner-thumbnailWhile many of you have been following the federal (FCC, DOJ) approval of the Comcast/ Time Warner Cable merger, some long-time cable observers warned me that “as goes California, so goes the country” with regard to conditions and approval.

On February 13, California delivered Comcast and Time Warner Cable a personalized Valentine, which included the approval of their proposed merger, provided that the following conditions were met:

  • The merged entity’s classification and regulation of the merged entity as a common carrier;
  • Mandatory provision of (voice) LifeLine services;
  • Offer 25 Mbps down/ 3 Mbps up speeds throughout the merged entity footprint within five years;
  • Offer standalone broadband service at prices no greater than Time Warner Cable’s current standalone prices for the next five years;
  • Meeting (or exceeding) California’s diversity requirements (called GO 156);
  • Specific website design practices;
  • Battery backup requirements for all voice customers;
  • Adopting Time Warner Cable’s practice with respect to third party equipment (e.g., Roku) interoperability;
  • Non-Interference with voice services;
  • Building out (presumably at Comcast’s cost) to additional schools and libraries;
  • Agreement not to oppose any municipal broadband (wireline or wireless) network plan for five years after the merger closes;
  • Increased reporting requirements for customer privacy complaints;
  • Significant expansion of Comcast’s existing Internet Essentials program (doubled speeds, simpler sign-up processes, and a “flexible” 45% penetration goal within two years);
  • Improved customer service requirements; and
  • Flocks of partridges and groves of pear trees (my insertion, although some of you would not be surprised to see the CA Commission insert this environmentally friendly requirement).

Not surprisingly, Time Warner Cable and Comcast jointly filed objections to the merger on Friday (full document here).  While some of the items above could be resolved, is it likely that Comcast and the Commission could reach a middle ground on utility regulations, massive Internet Essentials program expansion, and tacit support for municipal broadband deployments?

The California Commission and Comcast appear to have reached a stalemate.  At best, it’s two months of hard slog to define which new regulations Comcast will have to obey (and the penalty severity should they decide to ignore some or all of them).  At worst, California did the dirty work for the FCC.  Look for more color on the process in the coming 45-60 days.  No news is likely bad news on this front.

Comcast is the Envy of the Wireline IndustryPicture1

For all of the ad hominem attacks on Comcast as a large behemoth with horns, their earnings for the fourth quarter and full

year 2014 were spectacular.  No other wireline company comes close to their growth on an absolute or relative basis (AT&T and Verizon’s wireline businesses shrank in 2014; Comcast’s cable division grew $2.3 billion).

For all of the attacks Comcast has taken in the net neutrality debate, consider the following revenue growth engines that did not exist a decade ago:

  • Comcast had de minimis market share in consumer voice in 2004. By the end of 2014, they had 20.5% penetration of all homes passed and had generated a $3.7 billion in revenues.  Granted, this revenue stream is a derived number as Comcast does not sell stand-alone voice (and this revenue stream as of 3Q 2014 is beginning to shrink), but they have managed to generate good revenues (and terrific incremental margins) over the past decade;
  • In 2004, Comcast had no commercial services to speak of. At the end of 2014, this represented a $4.0 billion revenue stream growing at 21% annually. It does not go unnoticed that business services have overtaken voice as the 3rd largest revenue stream.  In a few years, even with Time Warner Cable’s video revenues, it could become the second largest.

That’s $7.7 billion of revenue, the majority of which did not exist a decade ago.  In one instance, Comcast had to develop a product whose quality was equal to or greater than that of an incumbent (including prickly things like E-911).  Comcast had to enter into thousands of interconnection agreements with large and small (mostly small) providers.

In the case of business services, Comcast had to convince customers that they were credible.  Connections to businesses had to be established.  Provisioning of non-standard services had to be accommodated, and Ethernet products had to be as good as or better than those offered by the incumbents.  And, unlike Time Warner Cable, Comcast has proportionally less cell site backhaul (large contracts with very long contract terms).  Michael Angelakis disclosed at a recent analyst call that they have 20-25% market share in the small/ medium business space.  Comcast may have made their entry into Business Services look easy, but it was far more risky than adding residential voice.

If $7.7 billion in incremental (primarily) organic revenue growth over the past decade is not enough, what about their foresight to add 5 GHz Wi-Fi?  This is a gold mine for the company, not only as the “guest provider of choice” for in-home routers (dual mode Wi-Fi modems) but also for outdoor Wi-Fi services should they expand their presence (and Angelakis suggested that this might be a reality within a year after the merger ends).  With T-Mobile and Verizon looking at LTE-U (Unlicensed, meaning use of Wi-Fi spectrum), Comcast is extremely well positioned.

There’s plenty to complain about with regard to Comcast.  But this is not a stodgy bunch of Philadelphia kings in their counting house, counting all of their money (see full rhyme here), but rather entrepreneurs with a long history of understanding local topology working to grow bandwidth services to homes and offices.  Their service still leaves a lot to be desired (hopefully a relationship with StepOne Inc. will fix that), and video and voice services are in subscriber decline, but they are not resting on their laurels and simply milking cash cows all day.  They are managing portfolios and, at least at the wireline level, outperforming their peers by a mile.

Next week we will begin our analysis of first quarter growth drivers by reviewing T-Mobile’s recent management presentation and other wireless news.  Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to sundaybrief@gmail.com and we’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).

Thanks again for your readership, and have a terrific week!

Fair for Whom? RIP, Unlimited Internet

Editor’s Note:  Jim will be participating on a panel moderated by Roger Entner of Recon Analytics on Monday, March 9.  One of the topics covered will be the effects of the Open Internet Order.  Register for free by clicking here and invite a friend.

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Greetings from a wintery Dallas.  As expected, this has been a week full of rhetoric with respect to the FCC’s pending Open Internet Order (pictured is Verizon’s response typed in Morse Code – a brilliant PR move, although one unlikely to help their position with the FCC).  As we discussed previously, there are going to be a lot of changes to telecommunications networks as a result of this order.  This week’s Sunday Brief analyzes the Open Internet principles and attempts to classify a few operational areas that we believe will change.  Again, the final version of the order is likely to be released in several months and all of these comments are speculative in nature.

 

The largest change will center on broadband engineering and management.  About all we know so far are the guiding principles:  Networks must be fast, fair, and open.  While these principals make for good sound bites, how each of these terms are defined will be the topic of great debate.

 

To What End: How Fast Should Networks Be?    

broadband availability FCCOn speeds, the FCC recently established a new standard that 25Mbps down/ 3 Mbps up must be available to classify as broadband (news release is here).  In their news release, the FCC announced that the gap had only closed by 3% (in 2012, 80% of the public had access to 25/3 speeds, while in 2013 that figure rose to 83%).  Another way to think about that is that the cable industry covers 83% of the country with at least 25 Mbps (and with the DOCSIS 3.1 and G.fast standards just around the corner, the probability that two or more carriers will serve the majority of the country with 100 Mbps or faster speeds is high).

 

Determining the benchmark speed corresponds to the country’s objectives.  The FCC chose three in their report to settle on a 25 Mbps standard vs. a 10 Mbps standard:  a) The ability to support multiple HD video streams; b) The ability to stream at the 4K video standard, and c) The ability to participate in an online class, stream HD, and download files simultaneously.

 

Without going further into the efficacy of determining which behaviors are appropriate for the national benchmark standard, I think you get the point:  Standards, by definition, are capricious and arbitrary.  What is acceptable for one household (e.g., the 81 million homes that do not pay for Netflix) is going to be unacceptable for another (e.g., the 38 million homes that pay for Netflix).

 

Fair for Whom?  RIP, Unlimited Internet

Networks must be fair.  The establishment of “What is fair?” in technology has been elusive since the introduction of the first computing devices 40 years ago.

 

One of the concepts that has been hotly debated during this process is open access, the process whereby each server connected to the Internet (provided they are engaging in lawful behavior) has the ability to reach the same Internet audience as any other server.

 

Open access, however, is often times confused with equal outcome.  Start-up companies connected to the AWS (Amazon) cloud or Rackspace or Savvis have a pretty good shot of reaching customers faster and more broadly than start-ups connected to a server connected in the office.  It may not be more than a few seconds faster, but if the start-up is operating a videoconferencing (or other low latency) service, this might matter.

 

Even before last mile throughput is considered, a tacit “paid prioritization” system already exists.  Servers that connect to the Internet through AWS or Rackspace or Savvis could (and in many instances do) pay more because these companies have faster and broader Internet connections (or, in Internet lingo, fewer “hops”) than their local telco (especially if that telco does not operate a large Internet backbone).  Small companies who cannot afford to connect to Comcast near each headend are already beginning with a disadvantage.  Without reinventing how the Internet works, that disadvantage is going to exist.

 

FTTX overviewThat leads us to fairer local (or last mile) networks.  Within a local network (see diagram), there are several components: 1) a loop (or drop) which is the connection from your home to the first entry point into the broadband network; 2) the network interface point (or multiplexer) where several connections combine traffic and are consolidated.  There could be multiple multiplexing layers; and 3) the Point of Presence which is the ultimate consolidation point for a regional area.  There are likely multiple POPs in a given market.  (For wireless networks, think of this as connecting to a tower, which acts as the first network interface point, and consolidates traffic at one or more routers/ switches in a market).

 

The FCC has now injected itself into the engineering of these three components. Broadband providers are left asking themselves:

 

  1. If I engineer network capacity to grow 60%, but Netflix tells me they are going to grow 90%, is that fair? Must I always engineer to the forecasted growth Netflix gives me?  What incentive do they have to provide an accurate forecast?  Will the government decide this issue?
  2. In addition to the increased capacity in 1), the FCC appears to be allowing paid prioritization lanes for certain applications (e.g., medicine, emergency services, government needs). Knowing that the cost to produce the first “express lane” is a lot less than the cost to build each incremental lane, how big should the paid prioritization lanes be for the initial deployment?  If the lanes are underutilized, can broadband providers use them for other purposes?
  3. Assuming the costs in 1) and 2) are not insignificant, what will be the mechanism to recoup these costs?

 

There are other questions broadband providers will be asking themselves, but, through explicit direction or through definition of “just and reasonable” the FCC will now become the de facto engineering department of AT&T, Verizon, Sprint, T-Mobile, Comcast, and others.

 

The broadband providers have no other choice but to react with “just and reasonable” pricing.  This will start with the elimination of unlimited plans for higher speed tiers (think Verizon FiOS Quantum speeds of 50 Mbps or higher).  Perhaps customers receive 500 GB of usage per month for a 50Mbps plan and 750 GB per month for a 75Mbps plan (the average broadband home uses about 55-75 GB per month today with fiber-based solutions using far more).  If this 2014 DSL Reports post is any indication, Verizon has been considering capping usage for the most extreme cases for some time.

 

The change will be quick.  Wireless plans used to be unlimited, but, in the process of 36 months, have changed to metered (while T-Mobile and Sprint continue to offer unlimited products, they are premium priced – 60% more at the individual level for T-Mobile).  And, as the broadband providers will be quick to point out, networks need to be fast, fair, and open.  Something’s gotta give – affordability be damned.

 

Surprise!  Your App is now a Telecommunications Service

The last network requirement is that networks must be open.  By redefining information service providers as telecommunications providers, there’s a strong possibility (held up by the courts through the Brand X decision) that many information services will now be defined as telecommunications services.  This definitional change is going to going to come as a surprise to Apple and Google.

 

Former FCC Commissioner Robert MacDowell (see his Wikipedia bio here) backs up this view in Friday’s USA Today editorial:

 

What many in Silicon Valley don’t understand is that, according to the Supreme Court’s 2005 Brand X decision, nearly any “tech” company that builds a telecom-style network to deliver its content and apps has the potential to be captured by the FCC’s new rules. If the agency tries to exempt some companies but not others, it will be choosing the politically favored over everyone else.

facetimeThe most obvious example of a telecommunications service by this new definition is Apple’s FaceTime (for the few of you who are not familiar with FaceTime here’s Apple’s current description of the product).  Because Apple operates a large, private network connected to many servers that need to interact with software on an Apple device (which consumers paid hundreds of dollars for), they are no longer an information services provider – they are now a telecommunication services provider.  Welcome to Title II, Mr. Cook.

 

What could this redefinition mean for Apple?  First, Apple cannot operate FaceTime as private network.  Google Hangouts, Skype, Fring, Tango, ooVoo, and dozens of other video calling apps now have the right to interconnect into FaceTime.  Apple will need to provide a programming interface (API) and will be subject to the same Open Internet rules as everyone else.   The same will apply for Google Hangouts (probably a net benefit for Google) and to Skype (owned by Microsoft).  The details of each API will be scrutinized by government officials and weighed against national benchmarks.  Start-up video providers will have to begin with multiple interfaces and be subject to the same interconnection requirements.

 

This is one hot mess.  But wait – it gets even hotter and messier.  FaceTime operates under the parameters of Apple’s operating system (called iOS) – it cannot operate independently (that is my understanding and I am sure one of you will confirm if I am incorrect).  If the telecommunications service provider has developed a proprietary system to allow communications services to operate, should this proprietary system be subject to the same open standards as other network providers?  Absolutely – we need to open up proprietary systems such as Siri, Cortana, Google Voice, Android, IOS, and Windows Mobile.

 

Today’s FCC may not have the will to take on Apple.  But these rules and their interpretation will survive this Administration and FCC.  And the courts will certainly help define telecommunications services, telecommunications systems, and telecommunications providers if the FCC will not.

 

Regulation is a tough business.  Engineering, invention, and competition are tougher.  The FCC has opened up a box it now cannot close.  This will drive the end of unlimited Internet plans for high-end users (resulting in a progressive tax in the form of overage charges), and usher in a new era of government-led Universal Service Fund subsidies which will lead to higher prices for all but the poorest and farthest-flung broadband users.  AT&T will refocus its efforts on Mexico and Latin America, and Verizon on paying down its debt (instead of deeper and broader investments).  Their stock prices will rise, but investment acceleration will fall.  That’s the legacy this FCC will leave for America.

 

Next week we will recap Mobile World Congress events and check in on broadband competition (spoiler alert: cable providers still dominate share of decisions).   Until then, if you have friends who would like to be added to The Sunday Brief, please have them drop a quick note to sundaybrief@gmail.com and we’ll subscribe them as soon as we can (and they can go to www.mysundaybrief.com for the full archive).

 

Thanks again for your readership, and have a terrific week!