Residential Voice, Data and Video: Change Is the Only Constant
Weinschenk: What did you look at, and what surprised you?
Myers: We looked at the North American residential communications services market. When I say that, I mean that we looked at voice, video and Internet access services. Mobile is part of that, both broadband and voice. Nothing was shocking, but some key points stood out. One is that residential services have traditionally been voice-centric business. Voice has always been king. That's really in decline. That market is in decline from the revenue perspective and usage perspective. [For example,] on the mobile side, when you look at minutes of use, it has really shifted. People are using voice a lot less, respective to data, which includes text messaging. They are also using their mobile phones for broadband, Facebook, Twittering, looking up their stock portfolio, what have you. The important point is that people are communicating in different ways, and voice is being deemphasized. There are other modes, particularly text messaging.
Weinschenk: What in particular is hot?
Myers: The biggest growth area is in broadband access. That's not surprising. There is a lot of room for growth there. There still is quite a bit of room to grow in North America. The other area is video services, video entertainment. By 2011, the video services market on a revenue basis will be larger than voice services. There is a little of a Catch-22, the ARPU – average revenue per user -- is pretty steady, in some cases increasing because people are taking enhanced packages.
Weinschenk: What's the Catch-22?
Myers: If you are a video provider, the cost of programming is going up, so they have to pass that [extra] cost on to consumers. That's why RPU stays steady for the base packages. Because of that, the video services will be the largest segment of the residential services market. It is the most challenging market in terms of margins. We are looking at everything: IPTV, traditional and digital cable services and satellite. [Incumbents] are evaluating the need to move to IP-based services. What's in the market today primarily from cable operators is traditional services. We took it all into account, including Verizon's FiOS, AT&T's U-verse and what other smaller operators are also doing it.
Weinschenk: Are the incumbents ready for change?
Myers: When you talk about cable operators and larger incumbent local exchange carriers, change moves slowly. When you have a large customer base and a lot of legacy technology, you tend not to be nimble. The question is a bit loaded in that most understand where they need to be and need to go. But it's taken a while to go there. Verizon and AT&T absolutely on the fixed line are getting there. On the mobile side, they are there with services. They tend to be challenged and have to move quickly now just to manage capacity [demands]. For AT&T, the biggest challenge is the success of the iPhone and broadband intensive applications. Now they have to cope with how they re-architect their network just to maintain assets to support all the innovation that is coming. The cable operators historically are pretty quick to move on some technology. They ... moved up quickly and are pretty much on par with DSL options. They've been pretty successful with VoIP options.
Weinschenk: What's happening in the voice segment?
Myers: On the voice side, the biggest area is not people moving from the PSTN to VoIP. It's really mobile substitution. It's the biggest trend and the cable operators have a slight disadvantage because they don't have a mobile asset. In some cases, some are building out mobile networks. Some are partnering with companies like Clearwire to fill those gaps.
Weinschenk: It seems that the mobile substitution trend is accelerating.
Myers: It's been in the works. I think the acceleration in the past 12 months is definitely much greater. And not just in North America. It is happening worldwide. People are cutting the cord. If you look back even five years ago, it was starting to happen, but within pockets of specific users, such as the young who grew up with mobile phones. Now it is much more pervasive. A lot of households are impacted by the recession. People are looking at their overall communications costs and will not cut mobile, but will cut fixed.
Weinschenk: Can you cite numbers that validate the trend?
Myers: If I look at penetration rates for households, fixed line -- traditional PSTN and VoIP lines – in 2008 had a penetration rate of 76 percent. That's still pretty high. If you look to 2013, the penetration rates will be 54 percent. In 2009, it is below 70 percent, at 68 percent. It is increasing quite quickly, and the rate of decrease for fixed line is going pretty quickly.
Weinschenk: Where is the industry in terms of fixed mobile convergence?
Myers: We are starting to see some providers offer some of those capabilities. I would say the uptake here in North America is not impactful yet. Verizon Wireless and T-Mobile offer a very similar service. Verizon Wireless' Hub launched earlier this year. If you get mobile service, they sell you a VoIP line. You plug it in and you have the ability from this hub [to use] multimedia features to connect to your mobile account. From this hub, you can have integrated messaging and seamless voice mail, text messaging. It is not a handoff, but � now I can have a lot of those features, from a fixed line device or mobile device.
Weinschenk: You suggest that there is a quality issue on the mobile side, however.
Myers: One of the gating factors that people are concerned about before they turn off their phone is if they have issues with the mobile coverage in the home. That's not uncommon. Operators AT&T, Verizon and Sprint will launch or have launched femtocell capabilities. It is not pervasive or priced aggressively. What they are mostly using it for is retention of subscribers who are very upset with their reception. It's not FMC, but it's trying to make the move to mobile-only easier.
Weinschenk: What else struck you from the report?
Myers: The choices for consumers for residential are not what I would say are great. Typically, if you want a bundle they have two options: the cable operator or the incumbent operator. Those two classes will spur each other with innovation. If you are a consumer really interested in bleeding or leading edge, however, there are service providers who are more pure plays who will offer interesting enhancements.