The convergence of technology, media and communications made the headlines many times this year. Whilst not a new theme, a mixture of technology evolution and a fear of being left behind has spurred companies forwards. In Europe, quad-play initiatives are central to the growth plans of many network operators. Conversely, the US has not quite taken to these ‘all-in-one’ offerings – although the big American service providers have kept a pulse on proceedings across the Atlantic.

2015 Year-End Review and Industry Predictions for 2016: Insights on the Telecoms, Media, and Technology Sector

By Cartesian

As 2015 winds down, we uphold our tradition of examining the key events of the last 12 months and evaluating their impact on the wider world.

As consumers, we have come to expect having things when we want and digital media is no exception. Service providers are responding to this with multi-platform content distribution in which every consumer electronic device presents an opportunity to view content. With many options on what our eyes can choose to watch, mobile video is becoming the new battleground for content producers and providers to establish themselves. Bill Gates’ famous prediction in 1996 that “content is king,” allied to Michael Eisner’s remarks two years prior that businesses have to reinvent themselves, gives us reason to now believe that “video content is king.”

For us, convergence as a theme has been keenly felt as we excitedly welcomed new colleagues from Farncombe Technology Limited to the Cartesian family earlier this year. With well-respected industry expertise across all digital media sectors, the acquisition of Farncombe has greatly expanded our capabilities in quad-play and digital TV offerings. With the integration now complete, we look forward to leveraging our combined expertise for the benefit of our clients in 2016 and beyond.

2015: The Year That Was

Consolidation and convergence in Europe.

Many large European telecoms markets are consolidating into a three-player convergent telco landscape, which is seen with Deutsche Telekom, Vodafone-KDG and Telefónica Deutschland in Germany; Telefónica, Vodafone ONO and Orange in Spain; and potentially France, should Bouygues Telecom join Orange (despite denial from both sides), alongside Numericable-SFR and Iliad. But for the UK, it seems it is the more the merrier with BT and Vodafone joining Virgin Media at the quad-play party this year, and Sky planning its launch in 2016. Convergence and quad-play has driven M&A in 2015, seen with BT’s £12.5 billion acquisition of British mobile network operator EE and Liberty Global’s €1.3 billion acquisition of BASE, the Belgian mobile operator. It should be of no surprise there has been a deal blitz over the past few years in Europe: with over 100 fixed and mobile operators in the region, consolidation offers scope to minimize costs, overcome demanding market conditions and meet demand for new digital content and services. Given the backdrop of enticing valuations and attractive interest rates, players have sought to act now rather than take a wait-and-see approach.

Big bets on mobile video.

52 million terabytes of data traffic will be exchanged on mobile networks worldwide by the end of 2015, which is nearly 60% higher than 2014 levels. With mobile network technology and devices improving all the time, video-hungry consumers have largely been responsible for this rapid increase in data volumes. In 2015, we saw US operators make huge bets on contrasting strategies for mobile video. Verizon made a big splash in November with the release of its millennial-targeted app, Go90, with a statement that there will be 52 original series on the app by the end of 2015. The goal is to attract the masses of users who live in a cable-free world of Hulu, Netflix and YouTube; the app is free to download with revenues coming from data usage and advertising. Days after Verizon’s move, T-Mobile US launched their ‘Binge On’ perk for qualifying customers: no charges from streaming video services like HBO, Hulu and Netflix, among others (albeit the videos are streamed at a lower quality). Verizon and T-Mobile may also soon be joined by AT&T. CEO Randall Stephenson, hinted to investors in December that they are working on bundling DirecTV content over mobile devices as they integrate the satellite broadcaster they acquired in July.

Quad-play still niche in the US.

Whilst there has been plenty of attention on mobile video in the US, quad-play bundles have yet to become mainstream in the market. Our report in August, The Quad-Play Balancing Act: Understanding the Business Model, highlighted how quad-play penetration in the US is just 1.5% compared with rates of over 30% in some European markets. AT&T is in the minority when it comes to bundling services, with 75% of their TV subscribers buying three of four services from the company. The deal with DirecTV was a natural progression in pushing this practice further, while gaining the scale to increase negotiating power with the content producers. Cable companies like Comcast have hinted at looking into such bundles, while others such as Verizon believe market dynamics stateside are not conducive to making quad-play work. The cost-benefit dilemma for quad-play providers is frequently portrayed as less churn at the expense of lower-revenue, although other trade-offs exist. It remains to be seen how the quad-play scene will play out in the US, but as we have seen in other countries, once it gains traction the market can move quickly to embrace it.

Gigabit networks.

Underpinning competition in the product bundle, operators made a series of announcements in 2015 on upgrades to their access networks to deliver higher speeds. For Cable Operators, there’s an obvious upgrade path from DOCSIS 3.0 to 3.1. Comcast has been trailing the new technology and, indicated in the summer that it hopes to roll it out within 2 to 3 years which will deliver speeds of 1Gbps. Telcos have more choices, and whilst some are already engaged in copper-to-fibre replacement programs such as Verizon, others – including BT, Deutsche Telekom and Swisscom – are looking to extend the life of copper for many more years with G.fast technology. Field trials this year have shown G.fast is currently able to deliver hundreds of Mbps which is certainly plenty for today’s demand. The key question for the G.fast camp is how many years does it give them, and what the costs look like between now and the eventual upgrade to fiber.

 2015 Prediction Review

In December 2014, we made ten predictions for 2015 – here’s how we did:

Prediction for 2015

Did It Happen?

High altitude network deployment trials show which approaches are viable

 

NOT YET

Trials have intensified and they are still undergoing - a clear winning approach has not emerged yet.

  • Google ran numerous Loon trials with plans for a commercial deployment in early 2016.
  • Facebook’s Aquila project using drones awaits federal permission. The Facebook-Eutelsat satellite is under construction and set to launch in 2016.
  • Low-orbit satellite initiatives (Space X, OneWeb) are set for testing next year.

LTE feeds small cell backhaul revenue growth, while 5G fails to take shape

 

NOT YET

While the technological case for such deployments has already been made, the economic case has not and it will take new monetization strategies to justify the investment. On the 5G front, there is still uncertainty whether the architecture of the 5G network needs to be significantly different to that of the LTE (4G) network.

Soft SIM arrives to Android

 

ALMOST

In April 2015, Google introduced Project Fi, allowing users to switch between T-Mobile, Sprint, or public Wi-Fi networks based on the network with the strongest signal. Currently, Project Fi is invite only and only available on the Nexus 6P and 5X – market penetration is limited.

New and refarmed spectrum enables innovation

 

NOT QUITE

We’ve already seen examples where the need to meet capacity demand is driving innovation (e.g. US’s MNOs competing to provide LTE throughout New York City’s subway system and TIM Brazil’s carrier aggregation deployments in Rio de Janeiro). The full range of innovations to meet urban needs has yet to be seen.

Over-the-Top leads to changes in the cable industry dynamic

 

YES

As lines between Cable and OTT are becoming increasingly blurred, we have witnessed a number of OTT partnerships to create value for end-customers (e.g. Cablevision (Hulu) and Mediacom (Hulu and Netflix)). Comcast plans to release its new OTT service “Stream” to its entire footprint by early 2016.

Pressure to implement 4K creates hardship for IPTV providers

 

YES

IPTV providers have begun feeling the pressure to provide 4K content to maintain parity with OTT offerings. Despite the increasing momentum for 4K services, there have been limited commercial 4K launches from IPTV providers (e.g. Vodafone Portugal’s TV Net Voz, BT’s Sport Ultra HD, Free’s Festival 4K).

Cloud differentiation continues

 

YES

Hybrid cloud orchestration continues to drive significant investments and M&A projects. Examples include:

  • IBM acquired Blue Box and Clearleap
  • Cisco announced the acquisition of Piston Cloud
  • EMC has added Virtustream’s services to its portfolio

Wearables market makes progress but remains fragmented

 

YES

With multiple vendors launching in the wearables market, the choice for consumers appears to be wide. There’s yet to be a clear market leader from either a vendor or OS viewpoint. Issues which have pushed OEMs to develop their own software and fragment the market have not fully resolved yet.

Disruption from the sharing economy continues

 

ALMOST

While we have not seen a major sharing economy app released in the last year that has disrupted a traditional consumer market, noticeable disruption has resulted from B2B sharing (e.g. Uber’s partnership with Hilton Worldwide and OpenTable, Airbnb partnered with Nest, Lyft’s partnership with Starbucks). 

Apple does not emerge as the mobile payment leader, yet

 

YES

The fragmentation of ecosystem participants, strength of other competitors (Samsung Pay, PayPal’s Here, Android Pay from Alphabet), lack of NFC on legacy iPhones, and pushback from merchants associated with CurrentC were all significant challenges to widespread adoption of Apple Pay.

 

Predictions for 2016

Looking forward to the year ahead, here are our predictions for 2016:

1. Pay-TV providers follow Comcast’s lead with their ‘Stream’ product and offer slim content packages over the top.

Although similar offerings from other US providers are a response to competition, their European counterparts continue to experiment with Pay-TV light propositions.

2. As OTT and TVE services mature, Pay-TV providers begin to crack down on password sharing.

Pay-TV operators begin to contend with credential sharing for the first time. Despite HBO/Netflix previously stated that they are not concerned about password sharing, this sentiment also begins to change.

3. Traditional broadcasters continue to resist the urge to embrace third-party OTT TV platforms.

A cohort of ambitious OTT TV startups struggle to deliver on their promises and scale back content offering and functionality, due to their inability to secure rights from broadcasters.

4. Despite pressure from Netflix and the EC (through AVMSD reform), who both love the idea of a “borderless” content rights ecosystem in the EU, no progress is made on this front.

Traditional broadcasters’ spending on content still vastly outweighs Netflix’s, and negotiating regional rights agreements remains deeply embedded in the traditional ecosystem. A paradigm shift on content rights across the EU does not happen any time soon.

5. SDN will continue to gain traction with more enterprise services being developed around the technology.

A general shift to networks-as-a-service begins. Premium services like bandwidth on-demand services (e.g. for sporting events) and flexible on-demand transport networks for enabling content providers to deliver live content through CDN servers will start to gain momentum.

6. Higher participation in crowdfunding will lead to more funding for sharing economy platforms, since small investors will have vested interest in sharing economy companies.

The funding landscape changes as entry into the sharing economy market increases. As users fund and own part of the sharing economy business, they become engaged advocates, increasing the rate of disruption on traditional consumer markets.

7. More partnerships will be formed between sharing economy companies and traditional businesses.

The trend continues, as the digital nature of sharing services allows for vast opportunities to integrate with traditional businesses.

8. Following the successes of industry frontrunners, more network operators get serious about decommissioning their legacy voice switches and moving to IP.

The business case for network transformation becomes increasingly attractive as operators revalue operational cost savings, property costs and revenue upside. In the US, FCC Network Change Notices from ILECs show an accelerating trend in central office decommissioning & copper retirement.

9. Global interest in the shut-down of 2G (GSM) networks grows as we approach the end of 2016 when the first networks are due to close.

More mobile operators discuss their plans in public with some seeking early closure to release spectrum for 4G, and others taking a longer-term view to support an installed base of 2G M2M modules.

10. In the mobile sector, Wi-Fi first business models grow in popularity.

Wi-Fi first business models – such as Republic Wireless and the Google Project Fi – gain popularity amongst consumers. More service providers consider this approach to limit MVNO costs.