Why Advertising and Video Matter for Mobile Operators

Advertising and subscriptions are the foundation of the consumer video entertainment business, and opportunities are shifting towards mobile venues, which explains the keen interest some tier-one service providers see in mobile video and mobile advertising.

Mobile display Internet advertising revenue overtook wired display Internet advertising in the United States in 2016, and continued to grow its share in 2017. As this trend continues over the next five years, mobile’s share of the total U.S. Internet advertising market will grow to 72.3 percent in 2022, a 56 percent increase from 2013.   

U.S. subscription TV revenue of US$98.9bn in 2017 will contract at a -1.3 percent compound annual growth rate (CAGR) to US$92.7bn by 2022, as streaming alternatives continue to grow, according to researchers at PwC.  

The United States is the largest over-the-top (OTT) video market globally, accounting for more than half (55.6 percent) of all OTT revenue in the world in 2017, PwC also says. OTT video revenue in the US reached US$20.1 billion in 2017 after 15.2 percent year-on-year growth.

Growth will likely continue at about an 8.8 percent CAGR will produce revenue of US$30.6 billion in 2022.

So entertainment service providers will seek to make a gradual or managed transition between linear and on-demand modes.

The United States continues to lead the global Internet advertising market, with total revenue of US$88 billion in 2017, about 40 percent of the global total. The market will continue to experience growth through 2022, expanding at a 7.7 percent CAGR between 2017 and 2022 to reach a value of US$127.4 billion.

 

source: PwC

Mobile Addressable Market is Smaller than Sometimes Predicted

Mobile and mobile internet service adoption rates normally are expressed as a “percent of population” basis. While logical, that might tend to exaggerate further upside, once a market such as Japan has generally been developed to a high level.

The reason is demographics. “Population” includes infants and very-young children who are not generally expected to be candidates for using phones. In Japan, something on the order of 18 percent of people do not use mobile phones (perhaps 37 million people).

But some 20 million people in Japan are nine years old or younger. The point is that the addressable market for phone use is much less than you would expect, based on people who do not yet use mobile phones.

source: comScore

source: CIA

Flat Rate, Not Unlimited Usage, Arguably Drives Mobile Customer Data Preferences

A new survey of 1,000 young mobile users (18 to 34 years of age) provides more evidence of the changing value proposition mobile service (and arguably, fixed network service).

Visible surveyed more than 1,000 cell phone users aged 18-34 across the United States and found 78 percent of those users would rather have a service plan with unlimited data and no ability to make calls, compared to an unlimited calling plan with no internet access.

In practice, few, if any, consumers would actually want a mobile phone that did not make calls. The point is what the survey responses indicate about the relative value of the device, in terms of communication capabilities.

The likely more-important finding is that 74 percent of respondents would prefer to pay a flat rate for unlimited data, texting, and calling over a plan that bills only for usage. That is not an unexpected finding, as much as some providers make marketing points about “pay only for what you use.”

As has been true for decades, and nearly the entire internet era, consumers prefer certainty of expense over potential ability to pay only for what they use. That is true even when many consumers understand they might wind up paying more than they would have by using a flat rate service.

That also explains why many consumers buy buckets of usage that are routinely larger than usage: customers want to avoid unexpected charges for incremental usage above the typical amounts.

So much of the demand for unlimited access is as much “cost predictability” as actual demand for higher usage. And much of the supply is motivated more by supplier competition than actual end user demand.

Still, price predictability (flat rates) is valued by consumers. Consider taxi services, where flat rate pricing is preferred over usage-based pricing (charging per mile or fractions of a mile).

AOL found that out in the dial-up era, when it moved to flat rate pricing, and away from metered usage, and saw adoption skyrocket. In fact, one might argue that predictability is key to all consumer interactions.  

When AOL moved to flat rate pricing in 1996, going to “unlimited” usage for $19.95 per month, a million new subscribers joined within weeks.  Previously, AOL charged $9.95 per month for five hours of usage.

source: Visible

It is difficult to find precise figures for AOL dial-up accounts in service prior to 1995, but there are estimates that 14 percent of U.S. residents used the internet in 1995. By 2000, it appears dial-up access had grown to about 34 percent of U.S. homes, and a great percentage of that was served by AOL.

It seems as though dial-up internet access peaked about 2001, as broadband access supplanted dial-up access.

source: Pew Research Center

source: SEC

source: Pew Research Center

Asia Will Drive More Than Half of All 5G Connections Starting in 2022

Even if you agree 5G will be introduced on a measured basis in many markets, including Asian markets, GSMA researchers believe “5G connections will scale rapidly, particularly in markets such as China, South Korea, Australia and Japan.”

By 2025, GSMA researchers believe 5G connections will reach 675 million across Asia Pacific, accounting for more than half of the global total for 5G subscriptions.

Starting in 2019, 5G networks covering 37 percent of the Asian population will be operational in Asia by 2025.

As elsewhere, the initial uptake will probably be based on users looking for faster mobile broadband access. If that is all that happens, 5G will be a tough business proposition, as the clear majority of new revenue now anticipated will come from applications, devices, platforms and use cases centered on internet of things and ultra-low-latency solutions.

source: GSMA

Will 5G Become a General Purpose Technology?

Some researchers predict that 5G will become a “general purpose technology,” and that matters because GPTs are the foundation for huge waves of economic growth. Some past GPTs are said to include:

• Interchangeable parts and mass production
• Military and commercial aircraft
• Nuclear energy
• Computers and semi-conductors
• The Internet
• The space industries

Others might be more selective and cite electricity and information technology as general purpose technologies that have mattered. The steam engine and electricity are seen by others as GPTs. Some cite the internal combustion engine as being a GPT.

Spoken language, the wheel, written language, printing, railways, automobiles and mass production are other often-mentioned GPTs.

source: David Kish

Few, if any, observers seem to count “communications” as a GPT, though. It that is so, then 5G will fail to produce as much economic activity as some predict.

source: The Economist

If 5G does prove to be a general purpose technology, then perhaps 5G might generate about $12 trillion worth of global economic activity in 2035. Of the three key revenue sources international standards bodies expect will emerge, some 36 percent will come in the area of mobile subscription internet access (faster speeds for mobile internet access).

If you do not believe 5G will emerge as a GPT (and you would be hard pressed to find many outside telecom who believe communications is a GPT), then 5G gains will likely fail to reach such lofty levels. Just sayin’.

Subscription Models Will Dominate for Connectivity Products

Even as some telecom service providers seek new roles in the advertising and enterprise services realms, the foundation of the business will remain subscription-based products. And even that is a shift from past practice, where consumption-based pricing tended to rule.

Sure, there were fixed monthly subscriptions for the right to use communications networks. But there also were key usage-based charging mechanisms based on volume of use: number of voice minutes per billing period (especially for long distance), number of text messages sent and received or amount of data consumed.

There traditionally also was a geographic component to pricing. Communications over longer distances were assumed to use more network resources, and therefore incurred incremental charges based on distance traversed. The best example was business special access, which had mileage components for pricing.

On the connectivity services side of the business, though, subscription-based pricing, untethered from usage, are becoming the norm.

Telecom services traditionally have been sold on consumption basis, as are nearly all other products: minutes of voice, number of text messages, buckets of data usage.

But video has been different: video services either are “free to air,” with no metering of consumption, or sold on a flat-fee subscription basis, with no consumption pricing at all. So among the big changes is a shift from revenue based on consumption to revenue based on number of subscriptions sold (on the customer side of the business).

Different revenue streams obviously exist on the business partner (advertisers, sponsors) part of the industry revenue stream.

The point is that revenue drivers and retail packaging models also are changing as the whole industry shifts to connectivity revenues based on internet access and video. Though cost per bit, cost per customer, cost per potential customer, revenue per service and account do matter, perhaps the key metrics are changing.

On the cost side of the business, “per bit” or “per unit consumed” metrics increasingly are nearly, or completely, irrelevant. One has to assume the network has certain capabilities, but revenue is not directly related to specific cost or revenue profiles, apart from subscriptions sold.

As with a grocery store, different products sold in a grocery stores each might have a different profit margin on sales (units sold), and what matters really is overall sales, and overall profit levels, not the specific profit levels of products sold. In other words, the profit margin per bit does not directly matter.

What matters are the number of subscriptions that can be sold, and are bought by customers, in aggregate. Obviously, the more types of products that can be sold, the more potential subscription sales.

So usage (data consumption) of communications networks is not related in a linear way to revenue or profit.

And that fact has huge implications for business models, as virtually all communication networks are recast as video transport and delivery networks, whatever other media types are carried.

Something on the order of 75 percent of total mobile network traffic in 2021, Cisco predicts. Globally, IP video traffic will be 82 percent of all consumer internet traffic by 2021, up from 73 percent in 2016, Cisco also says.

The basic problem is that entertainment video generates the absolute lowest revenue per bit, and entertainment video will dominate usage on all networks. Conversely while all narrowband services generate the highest revenue per bit, the “value” of narrowband services, expressed as retail price per bit, keeps falling, and usage actually is declining, in mature markets.

source: Sagheian

Some even argue that cost per bit exceeds revenue per bit, a long term recipe for failure. That has been cited as a key problem for emerging market mobile providers, where retail prices per megabyte must be quite low, requiring cost per bit levels of perhaps 0.01 cents per megabyte.

Of course, we have to avoid thinking in a linear way. Better technology, new architectures, huge new increases in mobile spectrum, shared spectrum, dynamic use of licensed spectrum and unlicensed spectrum all will change revenue per bit metrics.

source: Tellabs

Yet others argue that revenue per application now is what counts, not revenue per bit  or cost per bit.

So the basic business problem for network service providers is that their networks now must be built to support low revenue per bit services. That has key implications for the amount of capital that can be spent on networks to support the expected number of customers, average revenue per account and the amount of stranded assets.

Operating costs also become a continuing issue, as the cost per customer is high and getting higher, as competition shrinks the market share any proficient provider can expect to obtain.

As always, the problem is that propensity to spend is fairly linear, while data consumption and demand are non-linear. So the solution to maintaining a revenue-cost relationship that is positive is to reduce the cost of supplying a bit, add new revenue sources higher in the stack, add new geographies and accounts or otherwise gain scale.

source: Chetan Sharma

Not many who were in the communications business 50 years ago would have believed that would be the case, and so dramatically necessary.

Autonomous Vehicle is Among Most-Important Mobile Opportunities in IoT

Almost by definition, the greatest mobile operator opportunities in the broad internet of things area are those use cases requiring mobility, as that is among the more-unique features mobile networks can bring to bear. For that reason, autonomous vehicles are significant. Recall there once was a significant market for “car phones,” illustrating demand for “on the go” communications.

Most of the potential upside, though, does not come from connections to the mobile network, but devices, software solutions and other services or products required to make autonomous vehicles work, at scale.

The actual number of new auto connections for autonomous vehicles might be as large as you would suppose.

According to the U.S. Bureau of Labor Statistics, 3.8 million people operate motor vehicles for their livelihood. This includes truck driving, the most common profession in 29 U.S. states, which employs about 1.7 million people.

Many expect self-driving trucks to be among the first autonomous vehicles to hit the road. When autonomous vehicle saturation peaks, US drivers could see job losses at a rate of 25,000 a month, or 300,000 a year, according to a report from Goldman Sachs Economics Research.

Still, even some additional millions of autonomous vehicle mobile network connections are not going to generate a whole lot of new revenue, for any single mobile operator in any single country.

source: Lux Research

Most of the potential value will come from ownership of platforms, device supply, services and apps supporting autonomous vehicles.

One Billion 5G Smartphone Accounts by 2023

As always, since new devices will be required to take advantage of new 5G networks, early mobile phone subscriptions will be limited. The first 5G phones using the new millimeter wave frequencies will appear in 2019, probably in the second half of the year.

Ericsson believes about a billion 5G smartphones will be in service by about 2023, representing about 12 percent of all mobile subscriptions.

source: Ericsson

source: Ericsson

HHI Still is an Issue for Sprint, T-Mobile US

Most observers seem to believe the clearance of the AT&T acquisition of Time Warner (a vertical merger) clears the way for other big mergers, and that, in general, is likely correct.

But there still will be more scrutiny of horizontal mergers that increase market concentration. Among the tools used by the Department of Justice when evaluating horizontal mergers that reduce the number of competitors is the Herfindahl-Hirschman Index (HHI), a quantitative measure of market concentration.

Basically, the HHI quantifies changes in market share after a proposed horizontal merger. Generally speaking, any mergers that increase concentration by 300 points or more will trigger an automatic review. And markets where concentration already is deemed “highly concentrated” are almost certain to trigger a review. The U.S. mobile industry already is deemed highly concentrated, though less so than many other markets.

The proposed merger of Sprint and T-Mobile US will result in an HHI increase of over 350 points, boosting mobile market HHI scores to 3,250, says  Cheenu Seshadri, Three Horizon Advisors managing partner.

Since U.S. market concentration already is at levels that normally would trigger antitrust review virtually automatically, a review is certain.

DOJ and FTC Guideline for Assessing Market Concentration and Challenging Merger Proposals

source: Three Horizon Advisors

Furthermore, the market concentration in key sub-segments is likely to increase even further. The Sprint T-Mobile US merger would have significant impact in the prepaid and wholesale segments of the market, for example.  

source: Three Horizon Advisors

If There is a "Race" to 5G, it is Not About Service Provider Networks

By now it is obvious that a few countries and service providers are in a “race” to be first with 5G. It also is clear most countries and service providers do not share that sense of imperative. In the few cases where deployment will be pushed, there are reasons for the sense of urgency.

Some countries believe that “leadership” in other areas (app development, export markets, platforms, devices,  internet of things) hinges on 5G deployment. At a prosaic level, that is partly true: people, businesses and developers will not be able to create new experiences and potential revenue streams until they can assume 5G is ubiquitous.

It likely also is true that “leadership” in app, platform and devices will not hinge, ultimately, on 5G deployment.

Within some markets, there are marketing considerations, as none of the leading contestants wants to risk mocking that they are “behind the curve” in moving to the next generation platform. And it is obvious why suppliers of network infrastructure stoke the fires: it is good for sales.

But, in the service provider business, 5G mostly is not yet a race, outside a few countries where 5G mobile networks are seen as linked in some way to creation of other markets (exports, apps, platforms, solutions).

The notion of a race is an irresistible journalistic tool, a spur to infrastructure sales and might be linked, in some cases, to creation of other markets and early chances to develop such markets.

But it is less a race than often is portrayed, nor is service provider deployment necessarily and directly related to other forms of “leadership.” To the extent it is true that Europe “lead” in the 3G era, it arguably was related to early deployment of 3G networks that created new demand for devices.

It might be more accurate to say that the leading U.S. supplier, Motorola, missed the shift to 3G devices supporting data and email, while Nokia and Research in Motion caught the new trend.

Similar concerns were raised about 4G, when U.S. firms surged to “leadership.” There again, it arguably was not the prevalence of networks, but other factors, that were decisive. In devices, it was Apple reinventing the mobile phone that mattered. And 4G was the first mobile platform dominated by app and mobile internet use cases, not voice and texting.

And “leadership” (as exemplified by global brand adoption) was more an issue of application and platform providers having key roles, not something related to the availability of 4G as the access platform.

Something quite similar is likely to happen in the 5G era. The key advances will be about new use cases, revenue models and applications, especially those related to new computer-driven use cases, not human end user behavior.

If there is a true “race,” that is where the race lies. Service provider deployment of 5G networks is likely to prove relatively unimportant in the overall emergence of big new apps, use cases and revenue models for enterprise-centered IoT.