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A 2014 "To Do" List for Major Wireless Players
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With CES out of the way, it is now time to turn to the serious business of 2014. Since we all like to start the year with resolutions, goals, and objectives, here's my 2014 "To Do" for some of the wireless industry's key players. Read the full column here.
AT&T. Effectively integrate Leap Wireless, move it slightly up-market, and have a clearer segmentation of your prepaid offerings. Develop and market a clear vision of what the "connected car" really is and what it means for consumers. Oh, and invite John Legere to your party at Mobile World Congress.
Verizon. It will be harder to be the "premium network for a premium price," since the competitive playing field is more level. Verizon has traditionally been a pioneer in mobile ("IN", Android, LTE, Family Share). It needs a new trick in 2014 to keep its edge. LTE-A? Perhaps something in the enterprise? They are likelier to do something disruptive in pay TV content. The acquisition of Intel's OnCue is an important indication.
Sprint. The key priority is to come up with a differentiated value proposition in the market, once the network is on a better competitive footing, which will hopefully be by third quarter 2014. I expect them to stay with Unlimited. Sprint should use Spark to create differentiated offerings, including an attractive and transparent wholesale model. It should test, with Dish Networks, the viability of fixed wireless as an alternative/competitive broadband play for certain types of individuals/households, as a precursor to a potential broader partnership.
Read the rest of the column here.
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Thoughts on Net Neutrality and Broadband
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There has been a wealth of commentary on the recent Appeals Court ruling on net neutrality, which many see as a battle between the telcos/cable companies (providers of broadband) and the Internet giants such as Google, Netflix, Facebook, and Amazon. I'd like to offer a couple of different perspectives on this.
First, I think this is an important and necessary development for the broadband business. The growth of demand for video on both mobile and broadband networks is incessant. There will clearly be more experiments with regard to OTT business models -- perhaps even involving the pay TV providers themselves -- over the next couple of years. As an example, shouldn't Netflix, which is responsible for about 1/3 of all broadband traffic during evening hours in the U.S., have to pay for some element of what will continue to be hefty capital expenditures for the network service providers? Call it a tax, but it's no different than the public having to pay taxes to support additional road construction in high traffic areas.
Naturally, some of this will passed on to consumers, in the form differentiated pricing for broadband. Going forward, I think we're going to start seeing a greater spread of household consumption patterns for broadband services. The household requiring 50-100 MB download speeds and averaging 100 GB of consumption per month should pay more for their broadband service than those whose speed and consumption requirements are significantly less. The average price of broadband service might remain stable, but there might be more differentiation in "tiers of service" than we have today. Even Netflix has hinted at it. It's time to start getting into this mindset.
While the FCC and DOJ consume themselves with the "level of competition" in the wireless business, it is really the broadband business that needs to become more competitive. At best, most consumers have a choice of only two broadband providers -- and in many cases one of the providers offers a sub-par network.
Additionally, it is important to recognize that broadband is becoming a much bigger business for the cable companies and telcos. Comcast, Time Warner, Verizon, and other pay TV providers are being increasingly squeezed by ever-escalating content costs and the bundled channel structure that the dominant media companies such as Viacom and News Corp. insist on preserving. As a result, cable/telco profits are tilting toward their broadband businesses. I believe over the next couple of years, we will see these firms experiment with OTT services, accompanied by a more diverse suite of broadband connectivity packages and pricing options. If broadband providers continue to have their margins squeezed on content costs, which flow downstream to subscribers in the form of price increases, they'll more likely partner with firms such as Netflix, Apple, and others in disrupting the current model.
Consumers must also realize that good content costs money. Lavish productions, from Game of Thrones to House of Cards to Mad Men, cost upwards of $5 million per episode to produce -- and are paid for by advertising (Mad Men), sponsors & underwriters (Downton Abbey), subscription fees (HBO, Netflix), or shopping (Amazon). The backers of all this fabulous content have to be paid in some way. For all those who argue against the bundled model -- if you add up, on an a la carte basis, sports + Netflix + HBO + ten favorite "channels" + a selection of favorite shows purchased on demand --- it won't take long to get somewhere in the neighborhood of the average monthly cable bill (when broken out separately).
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A Different Take on AT&T 'Sponsored Data'
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A related issue to the above discussion of mobile and broadband economics is AT&T's Sponsored Data, which was announced at CES. AT&T has received more criticism than kudos for this move, which I think is misguided. Even though LTE, when it sings, feels like broadband, the economics are very different than in the fixed world. It costs the operator somewhere in the neighborhood of $1-2 per GB to deliver mobile data, in a capacity constrained environment. Even with additional spectrum and the the improvements of LTE-A, the economics of wireless data delivery will not change significantly.
Price to the consumer averages $8-10 GB, and those that are most aggressive on price place limits on 4G usage or actively throttle. Even with the improved economics of LTE, more spectrum, and so on, operator costs aren't going to drop dramatically. And, wireless operators continue to spend more on network capex than any other utility or network service provider as a percentage of revenues.
With all this as a backdrop, Sponsored Data (a concept I have been advocating for years) provides an opportunity to do more with video. Look at mobile advertising, which has only become a meaningful component of ad budgets in the past year or two. Now, with LTE, rich media ads will be an important and growing area. But brands are hesitant to deliver video ads to mobile because of the potential backlash from consumers who would naturally be hesitant to "pay" for the privilege of viewing an ad that would count against their data plans. For the historians among us, AOL had something akin to sponsored data in the early days of dial-up Internet when, yes, consumers were paying usage fees for services. If Sponsored Data helps grow the mobile advertising business, it could lead to the delivery of high quality ad-supported programming to consumers over wireless networks. One could imagine, for example, ABC offering the pilot version of a new TV show "free of data charges to your mobile device", or Amazon offering a selection of sponsored content to its Prime subscribers on their 4G Kindles.
All that said, AT&T needs to be more transparent about the business framework for Sponsored Data. AT&T has not provided any public guidance on what sort of rates sponsors would have to pay, which naturally opens up the company to criticism for lack of transparency or possible double dipping. I suspect the rather underwhelming list of launch partners is in part attributed to the fact that AT&T is "still working" on rates for Sponsored Data (meaning, it is charging too much).
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Verizon's Acquisition of Intel OnCue: Brilliant Move
| Verizon has been playing it rather conservative in mobile -- taking the high road on pricing, not launching any particularly new or risky initiatives, and so far being less disrupted by T-Mobile's moves than AT&T. Enjoying the margins while it can. Meanwhile, the media side of its business has been on a tear. Just this week, Verizon announced the acquisition of Intel's OnCue TV Division. The rumored price: a bargain ~$200 million. This was a brilliant move, even if Verizon doesn't ultimately execute on Intel's original (and challenged) plan for OnCue.
First, this was, in part, a defensive move. Verizon's current FiOS TV service is modeled much like a typical cable subscription. But Verizon has been fairly public about being interested in exploring alternative models for delivering programming, from an OTT model to some a la carte options. OnCue provides a platform to accelerate on those plans.
Second, Verizon is in this interesting position of having a national footprint and more than 100 million wireless subscribers, but only 9 million broadband subscribers and 5 million FiOS TV subscribers. I don't believe Verizon intends to take FiOS 'national' over broadband, but OnCue does provide a mechanism for Verizon to selectively deliver FiOS as an OTT service, using its own broadband or wireless network, or even, selectively, using competitors' broadband pipes (leveraging other assets it has, such as the Redbox and NFL relationships. Clearly, with its large LTE footprint, plus expansion of "mobile broadband" capabilities and network over the next couple years with additional spectrum and deployment of LTE-A, Verizon is well positioned to expand video programming offerings to wireless and wireline subscribers, and do it in unique way.
Third, there will be a growing battleground for an improved programming "UI". Verizon inherits a lot of development effort that Intel had put into improved search and navigation, which, let's face it, has never been a telco/cable company strength. Ironically, Comcast has been looking to license X1 (which I think is terrible). Given the disparate geographies, subscribers (wired, wireless), geographies, and vendor relationships/programming assets Verizon has to pull together to deliver a good UI, plus the bar set by the likes of Netflix, Apple, and Google Chromecast, Verizon needs help in getting to UI table stakes.
Verizon knows the halcyon days of 40%+ wireless margins in wireless are coming to an end, given intensifying competition and growing demand for [less profitable] data services. So, Verizon has been making a lot of bets in enterprise & cloud, and in the media business -- which are all inter-related in some way.
Even if Verizon has not 100% figured out what it will do with OnCue, this is a strategic area of growth for Verizon, and OnCue delivers assets and employees with skills outside its core competence.
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