Michael Kennedy, Principal Analyst, ACG Research
Service providers are seeking increasingly sophisticated business models with more complex interactions between their customers, suppliers, partners and even competitors. This is primarily a response to network convergence which is eliminating formerly safe legally protected telecom, TV, and wireless franchises. A secondary driver is the maturation of the voice, video, and data markets. Each new innovation, though widely successful, has a downside elsewhere in the ecosystem due to market maturity. For example, the success of wireless text is depressing demand for wireless voice. There is a little headroom for video, however, because we just can't get enough of the stuff.
Overall TV viewership increased 22 minutes per month per person over the last year according to the Nielsen Company. TV remains the dominant source of video content for all demographics. Median time watching TV is 40 hours per week. Though watching videos on the Internet and on mobile phones is growing in popularity, usage is only a little over one hour a week for these services.
In contrast, using the Internet on a computer is not growing. It is holding in place at about six hours per person per week, including use at home and at work. Wireless voice use also is at a standstill according to CTIA--the wireless industry association. Though there are no statistics on overall voice usage, it is likely to be growing modestly because its cost per minute has dropped so dramatically.
Revenue and service growth are achieved at someone else's expense. Often it is at the expense of another business unit within the same company--cannibalization. For example, Verizon Wireless' (NYSE: VZ) data ARPU (Average Revenue Per User) grew 15 percent over the last 12 months, but overall wireless ARPU was up only 2 percent over this period. This indicates that drops in voice ARPU offset most of the increase in data ARPU. Similarly, AT&T's (NYSE: T) wireless service revenue grew at a 7 percent year-over-year rate for the last quarter, but overall AT&T revenue grew at 2 percent over the same period. Declines in wireline voice services not only offset growth in wireless revenue but in wireline data services as well. External competition is among a small number of well financed giants. Consumer choice, however, is limited. Most of us are served by one telecom provider, one cable provider, and four or five wireless providers. (Satellite and broadcast TV also are important to the video industry but most of the action is in the converged networking space.)
"...the market positions of the traditional service providers--broadcast, satellite and cable--are being impacted by telco video offerings."
Though demand for TV including broadcast, time shifted, and digital is growing slowly, the market positions of the traditional service providers--broadcast, satellite and cable--are being impacted by telco video offerings. The biggest impact seems to be in the most attractive market segment: digital video. The National Cable Telecommunications Association (NCTA) estimates that cable's digital video connections grew at 4.9 percent last year, which is down from an 18 percent annual growth seen over the last ten years. This pretty well matches the growth in telco video offerings.
Payback is fair play, however. The FCC estimates that voice access lines dropped by 7.3 percent last year. Cable's voice service offerings are picking up much of this lost service. Adoption of mobile phones as the preferred choice for voice service and over-the-top VoIP services account for the remainder of legacy voice losses. Cannibalization also is a factor in voice access line loses. Service providers have programs in place to move their most attractive customers to higher value quad or triple play packages.
Wireline broadband service growth also is saturating. For example, year-to-year growth of broadband connections reported for the most recent quarter was 3.3 percent for AT&T, 3.0 percent for Verizon, and 6.2 percent for Comcast (Nasdaq: CMCSA). Wireless broadband is a very strategic threat to wireline broadband. The smartphone's ease of use and ubiquity is fundamental to the growth of wireless broadband. For example, Verizon reports that smartphones constitute 32 percent of its wireless base and 60 percent of new sales. The introduction of wireless services with shared bandwidth in excess of 100 Mbps will be introduced over the next several years. This will make wireless broadband functionally equivalent to many existing wireline offerings and trigger a new round of market share battles between wireless and wireline service providers. As in the other markets, much of this revenue shift will be in house.
"Large systems vendors like Alcatel-Lucent and Ericsson are responding to this need by developing a wide range of turnkey solutions and are even offering business consulting services."
Service providers are moving to more sophisticated business models in order to cope with increased competitive intensity and market maturity. Business models for consumer markets include collaboration with a broad range of media and content providers, intermediaries like Content Distribution Networks (CDN) and financial services firms; and systems vendors and software companies. Large systems vendors like Alcatel-Lucent (NYSE: ALU) and Ericsson (Nasdaq: ERIC) are responding to this need by developing a wide range of turnkey solutions and are even offering business consulting services. Network centric solutions also are getting a renewed emphasis including cloud and managed service solutions for enterprises and some consumer markets.
My view is that this increasingly sophisticated approach to the market will help most consumers and businesses. However, I am concerned about what will happen to about 10 percent to 15 percent of the population that continues to depend on analog telephone service and free broadcast TV.