Beruflich Dokumente
Kultur Dokumente
March 2012
Executive Summary
Relentless migration of data and entertainment consumption to mobile
Evercore - Confidential
Mobile data volumes have grown 33-fold in the last five years, and are projected to grow 18-fold in the next five years
Video traffic, which is now 50% of mobile traffic and will be 70% by 2016 has surged due to the proliferation of OTT and time/device shifts in content viewing habits, forcing over 40% of traffic off traditional wireless networks to WiFi networks
WiFi is delivering almost twice as much mobile data to users as the AT&T and Verizon cellular networks combined Smartphone penetration in North America has grown from 26% in 2009 to 75% expected by 2013, while global penetration has grown from 15% in 2009 to 42% expected in 2012
2012 sales of tablets and laptops in the U.S. is estimated to total $33.2bn vs. $33.7bn for smartphones Despite this traffic growth, delays in spectrum allocation and carrier uncertainty regarding data intensive business models have
Carriers outside the US, Japan and Korea have been slow to deploy new LTE networks Big winners have been tower, DAS, Wi-Fi and small cell related companies
In the U.S., subsidies now exceed annual capex; this trend is not likely sustainable, and may force carriers towards lower cost solutions
Subsidies paid by AT&T and Verizon have doubled in 2 years: from ~$10.3bn in 2009 to an expected ~$21.2bn in 2012 In five short years the profit pool in the handset area has seen a dramatic shift, with Apple now garnering 79% of profits and Nokia having gone from a 60% profit share to zero; Apple gets a higher subsidy than all other products, hence a dependency on the status quo
Most of the future growth will come from low end smartphones (under $150)
Given that Asia and Africa have smartphone penetration below the global average, as well as the need for new web entrants (e.g., Facebook and Amazon) to penetrate those territories with affordable products, future low cost disruption is possible through Android and
HTML5-based ecosystems
1
Evercore - Confidential
Driven by accelerating take-up of smartphones, adoption of mobile broadband and shifts in consumer usage behavior (i.e. strong appetite for streaming video and social networking sites)
Global mobile data traffic grew 33-fold between 2007 and 2010
Much of the rise was due to the rapid deployment of 3G, which increased network speeds ~10-fold over 2G (e.g. 270 kbps for GSM to 2Mbps for WCDMA)
Global mobile data traffic is expected to increase 18-fold between 2011 and 2016 According to Cisco, average mobile network connection speeds will increase 9-fold by 2016, due to 4G, a similar improvement as
what occurred in the 3G transition
Mobile video content will generate much of the mobile traffic data growth through 2016
This trend in mobile video will still leave carriers looking for ways to offload the traffic congesting their networks
Growth in tablets and cellular enabled laptops have been driving usage The average traffic per device is expected to increase rapidly The average smartphone will generate 2.6 GB of traffic per month in 2016, a 17-fold increase over the 2011 average of
150 MB per month
Sources: Jefferies research report WiFi: Revenge of the Fixed Line Network, dated January 25, 2012 and Cisco Visual Networking Index Forecasts dated February 14, 2012
Help from WiFi WiFi Offloading is Critical to Meet Growing Traffic Needs
Evercore - Confidential
Unlicensed WiFi spectrum accounted for 39% of data delivered to mobile devices, up from 32% two months earlier WiFi is delivering almost twice as much mobile data to users as the AT&T and Verizon cellular networks combined
The bullish view on WiFi substitution sometimes argues that WiFi is a way for operators to save capex. We do not subscribe to this view. Wifi is a safety valve relieving pressure on mobile networks as mobile data traffic grows exponentially. Jefferies, WiFi: Revenge of the Fixed Line Network (1/12/12) Carriers have already begun to rely on offloading, and this trend is only expected to grow
The prevalence of data consumption indoors has enabled offloading WiFi becomes a viable substitute to the mobile network in many instances
Cisco projects that mobile offload as a percent of total mobile data traffic from all mobile-connected devices (not just handsets) will increase from 11% in 2011 to 22% in 2016
February 2011
June 2011
Laptops 37%
Indoor 65%
Laptops 65%
Consumers are using more applications that are suited to being relatively stationary (i.e. reading a web page, watching video clip) as opposed to truly mobile; but they want this access from portable devices
Sources: Jefferies research report WiFi: Revenge of the Fixed Line Network, dated January 25, 2012 and Cisco Visual Networking Index Forecasts dated February 14, 2012
Problems Find Solutions WiFi Substitution Has Been Driven by a Confluence of Developments
Proliferation of WiFi Hotspots, Especially Public Public WiFi hotspots are expected to grow nearly 500% worldwide
Global # of public hotspots (mm)
8.0 6.0 4.0 2.0 0.0 2009 2010 2011 2012 2013 2014 2015 0.5 0.8 1.3 2.1
200 0 2009 2010 2011 2012 2013 2014 2015
Evercore - Confidential
Greater Penetration of WiFi in Households In the US, more than one in three homes have WiFi today and this number is expected to roughly double over the next 2-4 years
2003
2011
with WiFi 34%
No WiFi 95%
No WiFi 66%
Rise in Mobile Video In 2011, over 50% of all mobile data traffic was due to video consumption; by 2016 it will be 70%
Leading to Growing Usage of WiFi by Consumers Wireless users are accessing the Internet via WiFi in ever greater numbers
Wireless Access by Network Platform
March 2010
WiFi 27%
November 2011
WiFi 39% CMRS Networks 61%
PB per Month
90.0% 78.4%
Source: Jefferies research report WiFi: Revenge of the Fixed Line Network, dated January 25, 2012, Cisco Visual Networking Index Forecast dated February 14, 2012
Evercore - Confidential
The majority of smartphone growth is projected to come from the low-end segment, particularly in emerging markets; while the largest value segment of the market remains the high end
Global Handset Sales by Type (mm)
2,000 1,500 1,000 500 0 916 81 2006 1,032 1,051 1,020 1,069 624 2012 750 849 927 1,053 1,006 949 901
Smartphone '11-'15 CAGR: 17.8% Total Market '11-'15 CAGR: 4.0%
Saturated
866
120 2007
146 2008
170 2009
286 2010
481 2011
2013
2014
2015
WW 2009
NA 2010 2011E
Asia
Smartphone
400
$161
$170
$77 $23
$78 $37
2009
2010
2011E
2012E
2013E
2014E
2015E
2009
2010
2011E
2012E
2013E
2014E
2015E
Source: BAML Global Wireless Matrix 4Q11, Morgan Stanley Internet Media and eCommerce deck dated January 18, 2012, Credit Suisse Smartphones report dated June 21, 2011
How Will Operators Reinvent the Data Revenue Stream? Data Has Been the Growth Engine for Wireless Operators
Evercore - Confidential
At the FCC, weve recognized that for mobile carriers, like other businesses, matching price to cost can yield efficiency and other benefits. ... We recognize that investment wont occur without revenue and without returns on investment and that is why we havent prohibited usage-based pricing. -- Julius Genachowski, Mobile World Congress in Barcelona, February 29, 2012
In the U.S., non-voice (including text) reached 31% of US wireless revenues in 2010, up from 7% in 2005 In Western Europe, data revenue including SMS has been growing at a stable 10-13% annual growth rate over the last 2 years and non-SMS revenues have been growing at ~20%, driven by rising smartphone penetration U.S. Mobile Non-Voice Revenue ($bn)
$50.1 $41.3 $32.2 $23.2 $15.2 $8.6 $4.6
2004
2005
2006
2007
2008
2009
2010
Dumb pipe phenomenon as SMS revenues are dis-intermediated by bring your own messaging (e.g. iMessage) Pricing pressure or substitution due to WiFi Voice apps (Skype, Vonage, Google) accelerate mobile voice revenue declines Who owns the hotspot, and who ultimately is the initiator of the offload session could influence whether WiFi is a complement or a substitute for mobile operator networks. At the moment WiFi appears to be more of a necessity for mobile operators than
a significant threat How will revenue models evolve with UBP, data caps, RCS (rich communication services), QoS, etc.?
Source: Jefferies TMT Mobility research report dated September 7, 2011
Evercore - Confidential
Build-outs of LTE/4G May Not Be Sufficient to Handle Bandwidth Growth, Unless Accelerated
2G technologies, now more than 20 years old, will not peak until this year 3G technologies are not expected to peak for another 5 years. By 2020, the vast majority (56%) of subscribers will still be 3G
LTE is in its infancy today. Only 35 operators have launched LTE networks with about 6-7 million subscribers (vs. 5 billion users world wide). By the end of 2012, it is estimated that there will be 100 LTE networks with ~60M subscribers
North America Latin America N. Europe / C. Asia W. and C. Europe Mediterranean Sub-Sahara Africa Middle East India South East Asia China & NE Asia
2G 18% 40% 38% 33% 29% 67% 35% 56% 40% 41%
3G 59% 60% 57% 67% 71% 33% 60% 44% 60% 52%
4G 23% 0% 5% 0% 0% 0% 5% 0% 0% 7%
1G
2G
3G
4G
To meet demand, we need more spectrum and more small cell technologies
Sources: Evercore Technology and Telecom Equipment research report dated November 20, 2011 and Jefferies TMT Mobility research report dated September 7, 2011
Technology Improvements Provide Only Part of the Solution In the U.S., There is a Clear Spectrum Shortage
Evercore - Confidential
As operators deliver higher speeds via 4G/LTE, networks will requires a combination of more sites and/or more spectrum.
But with limited spectrum, increased cell site density becomes increasingly expensive unless spectrum becomes more abundant than it is today
On February 17, 2012, the US House and Senate passed long-awaited spectrum legislation that authorizes the FCC to conduct voluntary incentive auctions of 100+ MHz of broadcast spectrum in the 700MHz and other bands However, missing from this piece of legislation is the reallocation of 25MHz of spectrum by the Department of Defense, what was viewed as a key target of wireless carriers. In general, many industry participants are skeptical In addition, a recent revival of over-the-air-TV (pitched to consumers as a way of complementing online video) has the potential to undercut part of the FCCs rationale for selling off this broadcast spectrum to free up spectrum for wireless carriers
Further, broadcast spectrum sales are voluntary and expected to happen over 5-10 years; in other words, little new spectrum will be available in the US in the near term
Currently there is a global spectrum shortage, making further LTE roll-outs difficult The biggest concern facing many operators now is the squeeze on available spectrum (ABI Research)
Evercore - Confidential
Towers, DAS, Wi-Fi and Small Cell Related Companies Are the Big Winners
U.S. Tower and Cell Site Forecast
Carriers have a handful of tools at their disposal to limit the growing congestion on their networks: 1) utilizing more spectrum, 2) upgrading core network technology (i.e. LTE/4G), 3) employing offloading technologies, and 4) adding more cell sites In addition to WiFi offloading, carriers will rely on network upgrades and adding tower cell sites to ease congestion Another topology is the use of distributed antenna systems (DAS) which is a solution for spectral capacity issues
2.16
286,081 247,081 259,081 271,081
2.08
195,613 213,299
2.10
1.82
1.92
120,000 122,400 125,400 128,400
1.75
110,844 116,610 117,600 104,922 107,306
242,130
2007
2008
2009
2010
2012
The Physics of 4G Require Significant Incremental Cell Sites Technology Analog Digital 2G GSM / CDMA 2.5 3G 4G Year 1994 1996 2001 2006 2011 # of Antennae 3 6 912 12 814 # of Cell Sites (K) 130140 50 165175 250 365 Height 200 150 120 100 80
300% 250% 200% 150% 100% 50% 3/6/09
Towers
Cell Sites
Cell Sites/Tower
2013
2011
252.68
10/9/09
5/19/10
12/24/10
8/1/11
3/8/12
Tower Index
Evercore - Confidential
Despite Network Constraints, Carriers Are Spending More on Subsidies Than Capex
Subsidies paid by AT&T and Verizon have almost doubled in the last two years. Verizons total subsidy cost in 2011 was greater than its total
wireless capex spending, and AT&Ts subsidy cost was almost equal to its wireless capex spend Apple has benefited disproportionately from these subsidies ($450 per device) versus other high end vendors ($350 per device) Analysts are projecting that smartphone subsidies as a % of total wireless revenues are peaking this year, at 15% Verizon has transitioned 50% of its android base to its LTE network freeing up CDMA capacity
When the iPhone 5 (LTE) comes out (in September?) Verizon will have 270mm POPs covered vs. 120-150mm for AT&T
Verizon started 2011 with 27.4mm CDMA smartphone subscribers and ended with 38.1mm; LTE subs grew to 4.8mm by the end of the year Meanwhile AT&T started 2011 with 29.1mm HSPA/3G smartphone subscribers and ended with 39.4mm; AT&T had to build out 3G legacy capacity to meet demand; AT&T released its first LTE handsets in November 2011
10,722 $10,190
$8,973
$9,601
$9,793
$2,000 $0
2010
12% $312.28
2011
15% $387.04
2012
15%
2013
15%
2009
Subsidy % of revenues Subsidy / Gross Add 8% $245.76
2010
9% $258.97
2011
13% $414.04
2012
15%
2013
15%
Subsidy
Wireless Capex
Source: Oppenheimer Capex and Wireless Outlook dated February 2, 2012, JP Morgan Wireless Smartphone Update dated January 31, 2012 and Morgan Stanley research models
10
Carrier Business Models Remain Challenged As Subsidies Have Driven Down Margins for Carriers
Evercore - Confidential
Carrier margins are impacted by the introduction of new devices as these subsidies are expensed in the quarter of the upgrade; thus what appears to be a one-time effect, is actually a recurring effect Note: Wireless carriers accounting policy requires that handset costs be expensed in the period in which they are sold, and not amortized over the life of a subscriber
45%
44%
43%
43% 40%41%
47%47%47% 46%
45%
44%
45%
45%
45%
44% 42%
40%
38%
40%
35% 35%
35%
30%
2Q11
3Q11
2Q08
3Q08
4Q08
2Q09
3Q09
4Q09
1Q08
1Q09
2Q10
3Q10
4Q10
4Q11
1Q10
1Q11
25%
2Q11
3Q11
2Q08
3Q08
4Q08
2Q09
3Q09
4Q09
1Q08
1Q09
2Q10
3Q10
2008 $17,644
Aggregate EBITDA continues to grow, but at declining rates (AT&T declined in 2011)
2008 $22,090
4Q10
11
4Q11
1Q10
1Q11
Evercore - Confidential
From a Profit Perspective, the Smartphone Handset Market has Become a Duopoly
In 5 years, the industry has shifted from Nokia having 60% of profits, to Apple having 79% and Nokia having zero
Margins have declined despite an estimated 35% drop in the industrys combined R&D spend over the last five years
Qualcomms operating profit has gone from $2.9bn to $5.3bn, and with MediaTek ($0.4bn in operating profit) a distant number 2 baseband supplier
Apple and Samsung command ~90% of the operating profit in the global smartphone market
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Nokia is struggling to reinvent itself and depending on Windows Phone to regain share and relevance
100%
2010A BlackBerry OS
2011A
2012E iOS
2013E
2014E
2015E Others
Nokia
Motorola
Samsung
Sony-Ericsson
LG
RIM
Apple
HTC
Android
Symbian
Windows
Other 47%
Other 70%
Source: Asymco research, Gartner Mobile Communication Devices Forecast, Bernstein research dated February 24, 2012
12
Evercore - Confidential
Combination of Handset Duopoly and High Subsidies Make the Market Ripe for Disruption
This situation has created an opportunity for low cost Android handset vendors to storm the US market with the blessing of carriers, in exchange for very limited subsidies Carriers may also try to regain margins by creating potential new revenue streams from app developers and rolling off unlimited data plans
While Repurchase Intentions are the Highest for Apple
100% 80% 60% 40% 20% 0% Apple HTC Will buy again Blackberry Unsure Nokia Will Switch All Others 81% 46% 43% 45% 17% 2% 11% 43% 21% 36% 26% 29% 24% 52% 24%
demise
Apples industry leading customer stickiness statistics suggest more subscription-like profits, and thus more resiliency against negative macro forces; further, the anticipated iPhone5 (LTE) will drive a massive upgrade cycle While risking some cannibalization, Apple could pivot and enter the low-end market, and launch a smaller, cheaper phone to protect its share if needed Additionally, Apple has meaningful share expansion opportunity through new carriers (China Mobile, Docomo, T-Mobile, etc.)
50% 40% 30% 20% 10% 0% Year 1 Symbian Apple Palm Year 5 Microsoft Android Year 10 Blackberry OS
As the market is moving towards low-end smartphones, a new competitor is emerging Chinese OEMs
20% 0% 1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10A 4Q10A 1Q11A 2Q11A 3Q11A 4Q11A Nokia RIM Chinese OEMs Samsung Other
Source: Bernstein research on AAPL dated February 6, 2012; BMO research dated February 24, 2012, Strategy Analytics research
13
Disruptive Forces May Have Powerful New Entrant Friends Should Google and Apple be Wary of Facebook?
Evercore - Confidential
Low Cost Devices With Android or HTML5-Based Ecosystem Could Abruptly Democratize the Global Market
While Facebook is the most successful/downloaded app on Android/iOS, they also have exponential growth in under-penetrated
markets, APAC, MEA and Latin America Facebook Potential Market Opportunity
2011A FB Users (mm) MEA 56 APAC 197 Latin America 148 Europe 223 North America 175 YoY Growth Smart in FB Handset Phone Users ASP ASP 91.0% $87 $265 87.6% $104 338 105.0% $103 242 37.8% $150 270 17.1% $209 302 Total Penetration Smart Phones Smart (mm) Phone FB 30 2% 4% 184 5% 5% 34 6% 25% 117 14% 27% 107 31% 50%
Facebook could fill the gap between the handset ASP and smartphone ASP in developing markets with a lower-cost device Users could spend even more time within Facebooks walled garden, which is a direct threat to Googles search/ad business Facebook could offer a viable alternative for differentiated and desirable devices with deep social integration, without the Apple tax on carriers in the form of subsidies
Can the North America and European market continue supporting the latest iPhone models, effectively subsidizing older models for the rest of the world? A low-cost phone conceptually similar to a Chromebook, with a browser-based OS and HTML-based app platform, could cause substitution away from generic, low-end Android phones
With lower cost smartphones, Facebook could materially increase its penetration
Regardless of Facebooks support, an HTML5-based ecosystem could shift both economics and control away from Apple and Google Microsoft, Amazon and RIM also stand to gain from the creation of a cross platform HTML5-based ecosystem
Opportunities for new entrants offering tools for content creation, advertising and analytics Mozilla has recently announced its own efforts for an open HTML-5 based app store, potentially leading to this disruption
1,600 85% 1,200 69% 800 42% 400 7% 0 2010 2011 2012 2013 2014 2015 2016 HTML5 capable handsets Total Global handsets 21% 60% 77%
Source: Gartner, BAML HTML5 report dated February 17, 2012, Internet World Stats research
14
Two Different Strategies by the Leaders: Profit Now vs. Market Share Now
Evercore - Confidential
The Growth in Apples Revenue Share Has Boosted Its Stock; Google is Investing in Android With A View Towards Monetizing Mobile Search Revenue
Apples disproportionate revenue share versus its units share has been reflected in its stock price trajectory Googles unit share growth has not yet translated to material mobile-based revenue, which is reflected in its stock price Relative Share Price Performance vs. Market Share
700.0
AAPL Stock Price iPhone Market Share - by revenue GOOG Stock Price Android Smartphone Market Share - by installed base
43.0% 31.8%
539%
38.0%
27.7%
102%
Jan-09
Dec-09
Dec-10
Dec-11
2009A
2010A
2011A
2012E
2013E
Source: FactSet, Gartner research, Oppenheimer research dated November 13, 2011, Bernstein research dated February 24, 2012
15
Googles O/S Market Share Will Lead to Future Mobile Search Profits
Evercore - Confidential
Google Has Acted Preemptively to Protect its Search Share from the Smartphone Tsunami
Google is poised to capture share shift as queries shift from the desktop to mobile devices along with improvement in mobile CPCs The 2011 U.S. average revenue per search user was $63 for the desktop and $13 for mobile; they are both expected to converge to
Googles strategy is to expand ARPU after gaining market share; mobile is expected to steadily contribute an increasing proportion of Googles search revenue
Global Fixed vs. Mobile Search Queries(1)
100% 80% 60% 40% 20% 0% 2011A 2012E 2013E 2014E 2015E 2016E 30% 37% 43% 49% 54% 59% 70% 63% 57% 51% 46% 41%
$10,825
$31.7
33.4%
Source: Bernstein research dated February 10, 2012, Gartner research, eMarketer research, Evercore research dated March 5, 2012 (1) Chart excludes queries from tablets
16
Evercore - Confidential
Users still prefer to store at least some data locally for use when they dont have an internet connection
Amongst all the potential champions of HTML5, Facebook is in a unique position because it exerts tremendous user pull on its own, and can negotiate its way into a new ecosystem by providing preferred access to its user base, or withholding access to the same An HTML5-based ecosystem would strengthen Facebooks negotiating position vis-a-vis hardware and OS vendors A smartphone optimized for Facebook could be subsidized by Facebook itself to attract carrier interest Android if native prevails, or a Chromebook-like smartphone if HTML5 prevails Googles ownership of MMI gives it a stick to ensure that Android OEMs minimize fragmentation and continue to innovate on the hardware front Assuming Android fragmentation persists, Google could potentially execute a Kindle Fire-like disruptive strategy in the smartphone market, essentially pursuing a low-price (potentially subsidized)approach to handsets, just as Amazon is believed to be doing with tablets. Moreover, this approach could be justified by what's at stake in its core search business, should Android continue to fragment or prove to have less platform leverage than that held by the device provider or carrier
Google is also building a multi-layered strategy so it can pivot to whichever way the market ultimately moves
17
Evercore - Confidential
Just as no retailer has been dominant from one generation to the next, no handset manufacturer or OS has commanded leading market share for more than a decade; the mobile market is still young, with much innovation and integration (M2M) to occur How will handset providers, already hurting from forced standards (other than Apple) and commoditized offerings reinvent the delivery of their value add?
Carriers will welcome handset disruption to break the subsidy model, and they can strongly promote new
ecosystems (e.g., as Verizon did with Droid) Will Android catch up with Apple technologically; will Apple offer lower cost models that reduce their dependence on subsidies; what will the impact of lower cost models be on Apples GMs over time? How will HTML5 or Android empower an Amazon or a Facebook to disrupt the current ecosystems? Microsoft is still a new entrant; if WinMo fails to gain sufficient scale via Nokia, what will Microsoft do next?
With Google as Apples true competitor, and Googles monetization of mobile coming through Search, will Apple enter search (through Siri)?
Ultimately, Apples goal is to marginalize Googles source of strength its search dominance in any way
possible; Apple does not need to build its own search engine, but can simply promote other forms of search by default, or siphon off Googles search economics as they are currently doing
Apple could monetize commercial queries through a 70/30 style revenue share with the best of breed vertical search platforms that it leverages (e.g. Yelp), rather than following Googles model of directly targeting ads to search users
What will be Googles next moves to protect search share? What will be Apples next moves to protect device price points and its gross margins?
18
Evercore - Confidential
The growing importance of WiFi has led to changes in data consumption patterns, proliferation of urban hotspots, and innovation in longer range WiFi technology In the U.S., will cable deploy WiFi more ubiquitously? How will other small cell technologies be employed? Providers of cable pipes and WiFi hardware will be the beneficiaries of WiFi substitution
How will carrier business models evolve with the pending threats of VoLTE, bring your own messaging (e.g. Apples
iMessage, Samsungs ChatON), and ever increasing subsides?
19
Evercore - Confidential
(Units in millions, unless otherwise noted)
While OTT Has Grown Rapidly, the Pay-TV Market Has Not Lost Subscribers
Cable Landscape
In 2011, Netflix revenues were $3.2bn compared to HBOs of $5.0bn Netflixs 24mm subscribers have overtaken Comcasts (22.5mm), leading Comcast to offer its Xfinity streaming video-service and TV Everywhere YouTube accounts for 18.2% of peak period traffic on North America's mobile access networks (behind only HTTP and Facebook)
Growth in Over-the-Top Households
Number of OTT Substitute Househlds
10.4 10 4.5 5 0 2010 2011E 2012E 2013E 2014E 2015E Total OTT Households 2.5 8.6 6.6 15 15.0% 10.0% 5.0% 0.0% % of Total Occupied Households
Pay TV growth stalled as household formation stalled But OTT has helped extend cables lead in broadband, and will help usher in usage-based pricing and data caps
100 90 80 70
92.5
94.0
96.0
96.6
96.8
96.9
2007
2012
1Q10
2Q10
3Q10
4Q10
1Q11
Cable
Satellite
Telecom
20
Evercore - Confidential
As global smartphone and broadband penetration increases, communication spending by households is expected to increase as well Device proliferation has led to increasing video consumption This trend favors OTT providers, who benefit from increasingly fast streaming speeds and overall penetration However, two key factors indicate that fears of cord cutting are overblown 1. Access to live sports remains a high priority ~60% of TV viewers watch ESPN at least once in 3 days These viewers are willing to pay a premium for live sports, as ESPN charges the highest per-household subscription fee of any cable channel (~$4.70 per month, up 42% since 2006) There is a meaningful proportion of OTT users that simultaneously keep their Pay-TV subscriptions Survey data has shown that NFLX subscribers spend more time watching movies, and approximately the same time watching TV than non-NFLX subscribers through Pay-TV subscriptions
21
5.00% 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% Telephone Age
Evolution of mobile
1/80 1/83 1/86 1/89 1/92 1/95 1/98 1/01 1/04 1/07 1/10 1/13 1/16
Viewership of ESPN
Daily Once in 3 Days Once per Week Once in 15 Days Once in a Month Never 3% 11% 16% 0% 10% 20% 30% 40% 50% 11% 19% 41%
$2.00 $4.00 $6.00 $8.00 $12.00 $20.00 $30.00 Others
2.
Computer
Computer
Tablet
Tablet
Smartphone
Smartphone
All Platforms 0 5 10 15 20 25
All Platforms 0 5 10 15 20
Source: JP Morgan Telecom Industry report dated January 10, 2012, Morgan Stanley Media & Cable Survey dated May 15, 2011, Deutsche Bank Media Spotlight report dated August 23, 2010, SNL Kagan industry data
Evercore - Confidential
Operators are keenly focused on the OTT threat and have a formidable collection of tools at their disposal to combat and profit from it, including: Business innovations such as TV Everywhere, which offers ubiquitous subscriber access to programming (now deployed in limited regions by Comcast, Time Warner Cable and Verizon) and UltraViolet (cloud-based ecosystem)
Control of standards such as Enhanced Binary Interchange Format (EBIF) for advanced advertising (now deployed on most digital
set-top boxes), which offers advertisers and consumers internet-like interactive (and, eventually, targeting) capabilities
Control of subsidized STBs, which many outsiders have acknowledged as presenting a formidable obstacle to disruptive replacement
technologies, as many unsuccessful manufacturer forays have demonstrated
Ownership and control of the largest ISP operations, which are essential to the OTT model, along with lobbying power and a political
climate inclined to oppose any new net neutrality actions that might limit their ability to leverage control of this infrastructure to their advantage
Partnerships with OTTs, which are beneficial to both parties (i.e., Google TV / Dish Network) Usage-based pricing
Recent Operator Initiatives
Distributor
Comcast Verizon AT&T
Product Offering
Xfinity Streampix streaming-video service, TV Everywhere partnership with Time Warner, 75k on-demand shows and movies on TV or streaming online, viewing capability on iPhone and iPad and manage DVR from smartphone devices Redbox partnership to offer Netflix-like content streaming, 35k on-demand titles monthly, multi-room DVR functionality, ability to stream on Xbox Manage DVR from smartphone devices, ability to stream on Xbox Partnership with Google TV to promote OTT offerings, 3D on-demand content, search functionality of online content Ad sales partnership with Google, multi-room start/stop DVR capability, manage DVR from smartphone devices, viewing ability to on iPhone and iPad 10k on-demand shows and movies, manage DVR from smartphone devices (TV Everywhere) 10k on-demand shows and movies 3D on-demand content, manage DVR online; TV Everywhere
Operator Initiatives
Source: Gartner
22
Escalating Sports Costs May Price Some Consumers Out of MCC Market
Evercore - Confidential
Too Little Attention has been Focused on the Vulnerability of Existing Pay TV Models to a Decline in the Consumers Purchasing Power
Pay TV ARPU from 2005 to 2010 (1)
$80 $75 $70 $65 $59.82 $60 $55 $50 2005 2006 2007 2008 2009 2010 $64.27 $67.48 $73.75 $71.53 $77.43
Expenditure on Cable and Satellite TV Services as a Percentage of Post-Tax Income
While food and shelter alone exceed available income, leaving the bottom quintile to dip into savings, entertainment still comprises almost 5% of total spending
Lowest Quintile: Expenditure Breakdown of Income (2009)
$12,000 $8,000 $4,000 $0 ($4,000) ($8,000) $2,855 ($6,318) $1,628 $9,956 $3,501 $8,290
Education 3% Entertainment 5% Other 17% Housing (ex-telecom) 38%
Transportation
Post-tax income
Housing (extelecom)
Remainder
Healthcare
Liberty Media Corp. Chief Executive Greg Maffei described the rising cost of ESPN as a "tax on every American household." He said the cost increases create an opportunity for alternative TV offerings that could undercut the way cable channels are packaged as bundles of different programming. ESPN charges the highest per-household subscription fee of any cable channel, according to SNL Kagan, which estimates its monthly per-subscriber fees for the flagship channel have risen 42% to $4.69 since 2006. The average cable channel fee rose 24% over that same period to 26 cents a month. Wall Street Journal
Food
Source: Bernstein Research report dated May 2011, U.S. Telecommunications and Cable & Satellite: The Poverty Problem (1) Weighted average of data from Comcast, Time Warner Cable, Cablevision, DirecTV, and Dish Network
23
Preliminary Winners and Losers: OTT Evolution (Evercore View: Summer 2010)
Evercore - Confidential
Losers
DBS Providers TV Stations DVD Retailers/DVD Rentailers DBS Providers Lack of broadband as a defensive strategy TV Stations Migration online will reduce CPMs as overall traditional viewer base declines DVD Retailers / Rentailers Proliferation of web-based video and content delivery (e.g., Netflix via Samsung or PlayStation) Consumer patterns show that DVD rental growth is far outpacing DVD sales
TBD
Cable Networks MSOs TV/Film Studios Cable Networks Extension of brands (CNN, MSNBC and Fox News, Weather Channel, ESPN) Monetization remains difficult (sizable presence but low portion of revenues) Telcos Where plant is adequate to support bandwidth, will be successful Higher programming costs than cable but they remain a small part of the overall costs relative to cable Need a device shifting strategy Cable Usage-based pricing and models would mitigate cord cutting Might be better off even if relegated to dumb pipe Need a device shifting strategy Regulatory risk given future broadband pricing uncertainty Broadcast Networks Sites like Hulu may offer a digital strategy that generates incremental revenue Apple, Netflix, Amazon Strategies allow for monetization of professionally produced content Need bundled content to be a game changer TV and Film Studios Flexibility to adjust business models Google/YouTube? 24
Winners
Broadcast Networks Next-Gen Ad Agencies Data Equipment Vendors New Content and Aggregation Entrants Most of these will fail, but some will succeed and previously there was essentially little value in even trying Next-Gen Advertisers More eyeballs/discretionary income = higher CPMs, more clicks and more $ Data Equipment Vendors IP video is the biggest driver for network equipment spending
Evercore - Confidential
Losers
DBS Providers TV Stations DVD Retailers/DVD Rentailers DBS Providers Lack of broadband as a defensive strategy Reinvention with wireless? TV Stations Migration online will reduce CPMs as overall traditional viewer base declines DVD Retailers / Rentailers Proliferation of web-based video and content delivery (e.g., Netflix via Samsung or PlayStation) Consumer patterns show that DVD rental growth is far outpacing DVD sales
TBD
Cable Networks MSOs TV/Film Studios Cable Networks Live shows (CNN, MSNBC and Fox News, Weather Channel, ESPN) have a distinct advantage But will revenues keep pace with (sports costs)? Broadcast Networks Sites like Hulu may offer a digital strategy that generates incremental revenue TV and Film Studios Flexibility to adjust business models Film is still a VC business Netflix Wireless Telcos Where plant is adequate to support bandwidth, will be successful Higher programming costs than cable but they remain a small part of the overall costs relative to cable Need a device shifting strategy Need new data revenue streams
Winners
Broadcast Networks Next-Gen Ad Agencies Data Equipment Vendors New Content and Aggregation Entrants Most of these will fail, but some will succeed and previously there was essentially little value in even trying Next-Gen Advertisers More eyeballs/discretionary income = higher CPMs, more clicks and more $ Data Equipment Vendors IP video is the biggest driver for network equipment spending Cable Usage-based pricing provides upside Potentially better FCF if relegated to dumb pipe Need a device shifting and out of home strategy Regulatory risk given future broadband pricing uncertainty Apple If they continue to innovate, protect their gross margins, and the carriers accept the status quo of subsidies Google/YouTube Facebook Sports Rights When will the public revolt? Specialized Wi-Fi Companies E.g. Boingo
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Evercore - Confidential
Significantly ahead of its competitors in using WiFi offload as a network management solution Has the largest WiFi network deployed at key locations that already help manage data traffic and optimize the customer experience AT&T Almost 30,000 WiFi hotspots including the development of entire hot zones in congested outdoor urban areas Have encouraged customers to move their traffic to AT&Ts own WiFi network or some other WiFi. Due in part to aggressive WiFi build, network performance as measured by statistics such as dropped calls has improved materially over the last several quarters
Consideration: Customers have avoided moving up to higher tier data plans by utilizing WiFi. It could become more difficult for AT&T and other mobile carriers to move customers into higher usage tiers
Offers free Wi-Fi to its residential broadband customers (FiOS and DSL) and will soon expand offering to wireless customers (according to CTO). Has traditionally made limited use of Wi-Fi, preferring to focus on its cellular network Verizon Currently does not have any Wi-Fi hotspots of its own, primarily offering Wi-Fi services to broadband customers through a resale agreement with Boingo Has indicated plans to implement Wi-Fi strategically in high-traffic locations for 3G and 4G offload Cablevision, Time Warner Cable and Comcast have been deploying WiFi hotspots in shopping centers, restaurants, cafes train stations, marinas, malls and sports fields Cable (all) Cablevision and Time Warner Cable in particular have been extremely aggressive in deploying their WiFi network in the densely populated New York metro area, available to broadband customers for free The three companies allow each others subscribers to freely roam on their WiFI networks without any incremental charge Has been granted a patent for a technology that could allow it to offers its Optimum subscribers access to a WiFi-based mobile phone service Cablevision Will rely on its extensive WiFi network in the New York metropolitan area to carry mobile phone traffic, and roaming agreements with other carriers in areas that arent covered by WiFi
Consideration: Challenge of obtaining handsets it could offer to subscribers, and striking roaming deals with carriers
26
Evercore - Confidential
Aggressive WiFi buildout, including partnership with WiFi-sharing platform FON, enables BT to monetize incremental revenue streams without fear of cannibalization (unlike mobile operators) Can differentiate its fixed-line broadband products by bundling widespread WiFi access into offers Installed base of ~4 million WiFi access points supports its greenfield mobile project WiFi fill-in is particularly valuable to Iliad as it is facing a lack of digital dividend spectrum and relies heavily on national roaming Leading provider of Wi-Fi services, with > 400,000 global hotspots, 257,000 subscribers, 21mm network connections and partnerships with > 125 network operators including Verizon, BT, China Telecom, KT Corp, France Telecom, and T-Mobile Boingos wholesale services (46% of revenue) include roaming, platform services (i.e. resale), DAS infrastructure, and turn-key solutions for venue partners. Boingo is Verizons key Wi-Fi partner and is T-Mobiles key Wi-Fi roaming partner
Iliad
Boingo
Boingos strategy is to continue to expand its network into international airports, QSRs, arenas and malls, which allows it to offer subscribers and wholesale customers a more ubiquitous offering Added 2 airports in Rome and 10 in Portugal, increasing number of managed airport networks to over 60 globally. Boingo has also announced shopping center deals with 3 partners, increasing the number of managed shopping centers to 33 Republic Wireless: In November 2011, this start-up company began offering a smartphone that searches for a WiFi network first. It uses a cellular network (via wholesale agreement with Sprint) as back-up only where a WiFi connection cannot be obtained. Service costs $19/month for unlimited talk, text and data. Republics bet is that ultimately WiFi networks will be nearly ubiquitous, and that, as a result, cellular usage by its community will ultimately be manageable (Jefferies) Alcatel/Lucent: Announced in February 2012 the lightRadio product. It seamlessly finds and connects end users (smartphones/tablets etc.) with the best available wireless network, while helping carriers extend their reach by integrating Wi-Fi directly into their service offerings
Other
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