Archive for April, 2014

Hmmm….

Thursday, April 24th, 2014

Years ago I drafted a post for this blog. After seeking the counsel of wise co-workers, I decided not to post it and it stayed in my drafts folder. For some unknown reason, WordPress autonomously decided to post it yesterday.

I apologize for any confusion it may have caused. The report and analysis referenced are years old.

For complete transparency, there were a couple of reasons folks recommended I not post it originally. The first was that the vast majority of my readers wouldn’t be able to access the report. In respect to Craig Moffett’s and Bernstein’s intellectual property, I couldn’t share enough of the report to do it justice and yet my readers couldn’t access the rest of it. That didn’t seem fair to my readers. The second reason was that, while I liked Mr. Moffett’s analysis in this report, there are many other reports that he’s written that I don’t agree with. By strongly commending his thought process and analysis on this one report I may lead people to believe that I was endorsing (or worse yet, that Sprint was endorsing – even though everything that’s posted here is my own and doesn’t necessarily reflect Sprint’s positions or opinions) Mr. Moffett’s entire body of work.

I do think Craig Moffett is a very intelligent man, that he deeply understands the industry, and that he often provides incisive perspectives on various players in the industry – whether or not I think he’s right or wrong. I also think this particular analysis was very interesting. I don’t have time now to go back and see how right or wrong he was (using 20/20 hindsight). But anyway, for those reasons, I’m not going to take down this post (unless Craig or Bernstein ask me to).

Is the Mobility Revolution Deadly for Big Bells?

Wednesday, April 23rd, 2014

Please see my follow-up note on this post here.

Craig Moffett of Bernstein Research recently published a very informative report titled

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“The Long View: U.S. Telecom – The End of the Line(s).” In it, he shares his learnings from very detailed analysis of the cost and revenue models of wireline businesses.

Mr. Moffett is a very smart guy. I can’t possibly fairly represent the depth of analysis he has provided in this 40+ page report. I recommend you consider becoming a Bernstein client so that you can read this full report and to follow what he has to say about the industry. He won’t always be right, but his analysis is always worth considering.

And after considering this report, I think it’s clear that the Mobility Revolution, and the resulting displacement of wireline services by wireless services, may prove deadly for the Big Bells.

To give you a sense for the challenges they face, here are some quotes from the report:

  • “The Wireline business – encompassing both the TelCo and Enterprise segments – still accounts for more than half of Verizon’s revenues (after adjusting for Vodafone’s 45% ownership of Verizon Wireless), and a similar amount of AT&T’s. Similarly, Wireline accounts for a majority of assets – at Verizon, about 69%. And Wireline accounts for an even larger portion of costs – the best measure of activity, or what these companies actually do – at about 65%. Indeed, if one were to also include the in-region wired portion of the wireless network as part of the broader wired picture then these companies’ still-overwhelming dependence on their wired franchises becomes even more striking, with what is almost certainly three quarters or more of the revenues and assets depending on the wired infrastructure.”
  • “The TelCo (or regional Wireline segment) represents a larger share of profitability than it does of revenue within the Wireline business. Although not disclosed in Verizon’s and AT&T’s published financial reports, both companies are quick to concede that the TelCo segment is significantly more profitable than Enterprise, even if the TelCos’ trends are deteriorating. At both AT&T and Verizon, we estimate that TelCo accounts for approximately 40% of total EBITDA.”
  • “The combination of competitition, technology, and regulation is a potent brew, and fifteen years after “Being Digital,” the world of the TelCos is a far different place. Consider that, at the time of the ’96 Act, local residential phone service was essentially ubiquitous, with 97% of households connected to the wired ‘grid.’ Nearly 30% of those homes had a second line, either for their AOL dial-up connection, their fax machine, or perhaps for their chatty teenage daughter. That’s an ‘effective’ penetration rate of ~125%. Fifteen years later, more than a quarter of all homes have ‘cut the cord,’ and a quarter of those remaining have left for cable voice. Second lines have dropped to 11%. That’s an effective penetration rate of ~60%; effective residential penetration has been cut in half. And if we look forward just five years from now, we are on a trajectory for more than 40% of homes to have gone wireless-only, for cable to have 40% of what’s left, and for second lines to be a thing of the past. Do the math. Five years from now, in the residential market the TelCos will preside over 60% share of just 60% of homes… an effective penetration rate of just 36%. That’s close to another halving, but this time in five years. That decline rivals that of the film business at Kodak.”
  • “The rate of margin compression appears to be accelerating. Two things have happened in the two years since the end of our ARMIS data set (ARMIS reporting was discontinued afer 2007). First, the rate of access line losses has dramatically accelerated; the country is no longer averaging -4.8% total access line losses as it was from 2000 to 2007. This year, the average has been north (or south?) of a -10% annual decline. Second, broadband growth has slowed dramatically. Indeed, DSL growth tipped slightly negative for the first time ever in Q3. As a result, operators can no longer count on offsetting gains in ARPU to lessen the impact of a declining access line base.”
  • “There is a troubling tendency to dismiss this progression as ‘yesterday’s news,’ to view the big TelCos as wireless operators, or to assume that the wired phone business will decline gracefully. It won’t. The Wireline phone business is a quintessentially fixed cost business. When fixed cost businesses decline – and especially when they decline rapidly – they leave huge and intractable costs in their wake.”
  • “…Intuition suggest, however, that Wireline costs are primarily fixed, and this intuition can be empirically confirmed by the steep slope of correlations between access line losses and cost per access line – drawn from our extensive analysis of state-level FCC ARMIS data through 2007. The correlation suggest an overwhelmingly fixed cost structure for the Wireline business (in a ratio of roughly 50 to 75% fixed and 25 to 50% variable).”
  • “Importantly, it is the nature of fixed cost businesses like telecommunications that ‘threshold effects’ become increasingly pronounced over time. As volumes decline, variable costs are shed. The remaining cost structure is therefore, by definition, more fixed and less variable than it was before. In any high-fixed-cost business, it is always the case that initial unit cost escalation yields even greater sensitivity to further unit cost escalation; as the margin ‘cushion’ gets smaller and smaller, it requires a smaller and smaller subsequent change to volumes to trigger a larger and larger subsequent change in profitability. If this ‘negative operating leverage’ dynamic is at work – as it appear to be – then it is plausible to expect that Wireline margin compression will not lessen; it will accelerate.”
  • “The combination of falling revenues and falling margins is a noxious combination; the dollar amount of EBITDA generated by the U.S. Wireline industry has dropped from an annualized run rate of $52B seven years ago to an annualized run rate of just $38B in the just reported Q3.”
  • “The implications of our analysis of the Wireline segment are troubling for the industry going forward. That access lines will continue to decline from here is a foregone conclusion. That Wireline margins will decline with access lines is more controversial, at least to judge by consensus estimates.”
  • “Our AT&T model projects a decline from 31.8% in 2009 to 26.3% in 2013 in overall Wireline margins. … As a context, each 100 basis
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    point decline amounts to about $650M in reduced Wireline EBITDA or operating income. Our 550 basis point variance from today’s margins amounts to a $3.6B gap by 2013, equal to 17% of ‘consensus’ EBITDA and 54% of ‘consensus’ operating income.”

  • “Our Verizon model projects an even steeper decline, as Verizon’s costs appear somewhat more fixed and less variable than AT&T’s. We project a decline in Wireline margins from 24.2% 2009 to 17.0% in 2013. … Every 100 basis points of margin contraction at Verizon translates to about $460M in EBITDA or operating income. Our 720 basis point variance from implied consensus amounts to a $3.1B gap by 2013, equal to 30% of ‘consensus’ EBITDA and 153% of ‘consensus’ operating income, putting income firmly in negative territory.”

Mr. Moffett is a very smart guy. I can’t possibly fairly represent with this tiny sample from his report the depth of analysis he has provided. I recommend you find a way to read this full report and to follow what he has to say about the industry. He won’t always be right, but his analysis is always worth considering.

Although Verizon and AT&T are clearly being very successful in benefitting from the growth in mobility, they are undoubtedly also carefully weighing how to slow the impact of mobility on their core wireline economic engine.

Some of us, however, would rather mash the accelerator to the floor and say – bring on that Mobility Revolution – full steam ahead!

The Six Cs of Mobility

Tuesday, April 15th, 2014

Nearly a decade ago I introduced McGuire’s Law of Mobility. Over the years, I’ve refined it a bit to simply say “The value of any product or service increases with its mobility.” and, over the years, the truth of the law has been demonstrated time and again.

But back in those early days, despite having anecdotal examples to point to, I couldn’t really explain “how” mobility increases the value of a product or service.

A few weeks ago I was asked to speak at an event hosted by Mobiquity. That event gave me the opportunity to try to capture and communicate thinking I’ve been doing recently about the specific ways that mobility creates value in products and services – either for the end customer (and thus indirectly for the supplier) or directly for the supplier. In some respects, this is the result of looking back with 20/20 hindsight and merely capturing what we’ve already seen, but I do think it’s helpful for those looking forwards to consider how to practically design the value of mobility into their products and services.

So, here are the six C’s of mobility – six ways in which mobility adds value to a product or service:

  1. Connectivity
  2. Community
  3. Content
  4. Context
  5. Commerce
  6. Cost

Connectivity

At it’s core, integrating wireless connectivity into a product or service is about, well, connectivity. What I mean here is specifically full-time two-way connectivity into back end systems that enable the product or service to operate as part of the larger value proposition of the firm, and therefore provide greater value to the end customer.

Community

Some people refer to the “social revolution,” and we’ve certainly seen a dramatic rise in social networks and the huge impact these sites have had on how we interact with the world around us, but I’m not sure whether it’s a separate “revolution” or a subset of the “mobile” revolution or if they are both the same revolution – the “social/mobile” revolution. Whatever the case, the fact that products and services have wireless connectivity built in makes it possible for users to share with their friends and provide support for one another. This is easiest to see in mobile apps, but I’ve also seen it in retail kiosks for sunglasses and makeup, and built into digital cameras, and I believe we’ll increasingly see the opportunity to “like”, “share”, and give or receive encouragement being built into more and more connected products and services.

Content

Wireless connectivity also makes it simple to leverage the reach and richness of the Web with a real-time element and with relevance that goes well beyond what’s possible in a desktop Internet experience. A navigation device that provides recent reviews of nearby restaurants, along with the daily specials would be a great example. (I’d love to have this built into my next car…) Another example is the simple Bible app. When I started carrying a PDA a couple of decades ago, the Bible app was one of the first things that demonstrated to me the power of mobility. Wherever I was, I could read God’s Word. However, a single translation would consume almost all of the memory on my device, so forget about additional resources like commentaries and Bible dictionaries. Today, most Bible apps don’t store any translations locally, and yet, over the wireless connection, you can access almost every translation, commentary, or reference work ever published.

Context

In the mobile community, we’ve often spoken of the unique value of “context” that mobility enables above and beyond what has ever been possible in a desktop application. Because it’s been so broadly discussed, I won’t belabor the point here, but I do believe that the ability of wirelessly connected products and services to adapt given place, proximity, and priority does provide tremendous incremental value never before possible.

All of the C’s listed above are value enhancements that the end user directly realizes. Hopefully that value realization translates into value for the provider (differentiation, premium pricing, customer loyalty, etc.). However, the next two C’s are ways in which the provider benefits directly from the integration of wireless connectivity into the product or service.

Commerce

Wireless connectivity creates a tremendous opportunity for the provider to extend their business into adjacent spaces and realize new untapped revenues. A service provider may be able to offer new kinds of services, not previously possible. A product or service company may be able to present to customers extremely relevant advertising, or may be able to (while respecting and protecting user privacy) collect data that has analytical value for the company or a partner. Many other adjacent revenue opportunities will likely become available to those that are integrating wireless connectivity into their business.

Cost

The final C deals with the opportunity to replace components with cloud content. For example, the first “connected” watch I bought was satellite connected to the atomic clock in Colorado. I thought it was cool geeky technology. I showed it to a jeweler and he thought it was cool because it meant that you could build an incredibly accurate watch with very inexpensive components. Similarly, I’ve often told the story of TeleNav, a company that replaced expensive GPS navigation electronics with software on a mobile phone connected back to maps and data in the cloud. As wireless connectivity gets integrated into every product and service, there will be many opportunities to take costs out of the product or service by replacing expensive physical elements (e.g. highly trained specialists in the field) with content and capabilities hosted in the cloud.

I hope these 6 C’s are helpful to you as you consider how to revolutionize your industry!