| Moffett: Caps "very likely spell the end of mobile video" |
| Written by Dave Burstein |
| Sunday, 13 June 2010 13:51 |
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"[Investments over the next few years,] including the provision of 4G networks, will drive down the cost of wireless data dramatically," Moffett reports, citing estimates of capacity growing from 2.9 to 20 times with a capex level that will be declining after the current catch-up. He thinks AT&T raising profits is great, even beyond the 300 basis point margin increase AT&T recorded last year. I think consumer prices going up is terrible, and Julius Genachowski just testified to Congress making broadband affordable is his top priority. With enough competition, supply and demand usually reach a fair compromise. There's no room under such a low cap for video. Netflix "content is currently encoded at a minimum of 500 kilobits per second and a maximum of 3.4 megabits. At 500 kilobits, a 200 MB plan user would burn through their monthly data allotment in just 12 minutes per week." At 1 megabit, still a lousy picture by today's standards, even the top tier is less than an hour a week. People will need to keep their landlines for video, preventing an erosion of the DSL business. Nat Worden at Dow Jones thinks wireless caps are also great for the cable modem business. This pushes anyone who wants TV on the go to the telco's video offerings, which are failing because they are ridiculously overpriced. Verizon has "signaled six ways to Sunday that they like the idea of metering." That's how to achieve monopoly pricing in a way that's hard to prosecute despite the companies, Wall Street, and even the Department of Justice knowing exactly what's going on. V&T have 60% of the U.S. mobile market, and a much higher % of mobile data. They have such a commanding lead the two of them alone may dominate the market; Sprint and T-Mobile have been losing money and falling further behind. Moffat is off-base in thinking that a 2 gigabyte cap is needed to prevent degrading network quality according to slews of technical experts who've analyzed the problem as well as AT&T's President John Stankey. There is some point at which demand becomes economically impractical to serve, but that's 10 to 25 times the 2 gigabyte cap AT&T is imposing. A good working figure for wireless bandwidth costs is about $1=2/gigabyte for wireless today on a good network, compared to 3 to 7 cents/gigabyte on efficient DSL or cable. If $2 of the $15 low end price went to bandwidth, the $15 plan would support a 2-5 gigabyte cap. That's based on reasonable assumptions of time of day, percent of cap typically used, and other factors. If $3 of the $10 additional for the higher plan went to bandwidth, 10-25 gigabyte cap would be in line. Many reporters made the mistake of assuming a low cap was reasonable because a high cap is supportable. Moffett's last thought is also worth re-examining. "[With] Lower prices would come lower investment returns… and therefore lower investment" is almost a tautology. Anything that raises profits will induce some amount of additional investment, but few think we should double corporate profits by taking the money from consumers.
The question is how much of the profit decrease/increase would go to investment and how much to higher dividends? I believe, based on past experience and the structure of the industry, most of the money would go to the shareholders. That's particularly true because "investment" in networks is rarely from "investors" making theoretical asset allocations. Virtually all carrier investment in telecom comes from the profits of the existing companies, not "investors" putting money in. Most carriers devote 60-80% of cash flow to dividends and buybacks, and the rate would probably be higher with incremental income from a price hike. In theory they could decide to stop putting part of the profit back into the business, but with even weak competition there would be massive losses while the companies could go out of business. At first pass, most of the increased or decreased profit in this business affects the stock price far more than the level of investment. These are tough questions to be sure about, however. So Craig is right for his audience - people making money on the stock - but not on public policy. "AT&T is running their business with a profit motive," Craig adds. They prefer monopoly pricing. |
Craig Moffett (a friend) is a great "big picture" guy, a top tier Wall Street analyst always interesting to read. His job is to help investors find companies with improving profits, not the public and consumer interest. Like most of us, he's concluded that if Verizon follows, the caps will s