Cord Cutting Continues to Accelerate in Q2 2016

The last of the significant publicly traded US pay TV companies reported their results for Q2 2016 today, and as such we now have a complete picture of what happened with pay TV subscribers in the quarter. The comment below is based on data gathered on a quarterly basis by Jackdaw Research, and may be attributed to Jan Dawson, Chief Analyst. Jan may be reached for further comment at jan@jackdawresearch.com or (408) 744-6244.

The seventeen largest publicly-traded pay TV providers in the US collectively lost 834,000 subscribers in the year to June 2016. As the chart below shows, this is the latest set of data in a consistent trend which has been underway since 2014, with almost every quarter bringing an even higher number of cord cutters. The trend is becoming harder and harder for both pay TV operators and industry watchers to ignore, as defections grow consistently over time. The industry needs to confront this trend head-on and craft strategies which are more appropriate for a shrinking market. Those without solid broadband offerings, notably Dish, will be most threatened as this trend continues to play out. Though Sling TV may provide some respite, it’s becoming clear that it isn’t enough to offset declines in legacy pay TV services for Dish. Overall, the larger cable operators are faring better at the moment than any other group, with smaller cable companies continuing to shrink and telecom-based TV falling fast as Verizon sells assets and AT&T shifts its focus to satellite-delivered TV.

There is a lot more analysis and several more charts on the accompanying post published today on the Beyond Devices blog.

Q2 2016 Cord Cutting large all public players

This data is based on public reporting from the seventeen largest pay TV providers in the US:

  • AT&T
  • Bright House
  • Cable ONE
  • Cablevision
  • CenturyLink
  • Charter
  • Comcast
  • Consolidated Communications
  • DirecTV
  • DISH
  • Frontier
  • Mediacom
  • Suddenlink
  • Time Warner Cable
  • Verizon
  • Windstream
  • WideOpenWest.

The only major provider not covered in this data is Cox, which is privately held. On the basis of various estimates, it is likely that Cox is losing a few tens of thousands of pay TV subscribers per year on top of those reported above, so its inclusion would worsen the picture slightly. The data above also include Dish’s total reported subscriber base, which in turn includes its Sling TV subscribers. Without the Sling TV subscribers, the decline would be significantly worse, at around 1.4 million year on year losses. Again, there is more detail on this subject including additional charts in the accompanying blog post here.

Verizon Adjusts its Wireless Plans

Verizon Wireless today announced changes to its postpaid plans, with higher prices and significantly higher data allowances, among other changes. The comment below may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research.

What Verizon is doing is raising prices by a small amount while raising data allowances by a greater amount – essentially charging you less per Gigabyte, but forcing the average price paid up in the process. What this comes down to is that there’s very little growth left in the traditional parts of the wireless industry, and as such revenue growth has to come from increased revenue per user. At the same time, smartphones are nearing saturation, and so the revenue growth that’s come from people adding data plans to their accounts is also almost over.

Since carrier add-ons like mobile music and video have largely been eclipsed by over the top services like Spotify and Netflix, the only real option left to drive new revenue per line is to move people to higher tiered data plans. In some cases, that can be done organically by setting prices in such a way that people voluntarily move up, but you’re going to see more of this kind of migration to new tiers, with higher data allowances making price increases somewhat more palatable. Verizon has always had the most loyal and conservative base, which has also been more willing to pay for quality, and so it’s betting to some extent that its customers will swallow these changes too. But raising prices is always a risky business when you’re facing strong competition, especially on price.

In general, we have an increasing bifurcation between AT&T and Verizon, which are largely using their own or third party prepaid brands to compete in the most price-sensitive segments, and Sprint and T-Mobile, which are more willing to engage in price wars with their postpaid brands. Both of the larger carriers have resisted engaging in too much price competition with their postpaid brands, because that’s a downward spiral that’s really hard to pull out of.

The other changes look like they’ll give T-Mobile more ammunition as they continue to accuse the other carriers of treating their customers badly. Charging customers to be able to avoid overages through throttling is perhaps the best example of this, and I’d expect John Legere to beat Verizon over the head with that one in particular, given that this is standard practice at T-Mobile, rather than something customers have to pay an additional fee for.

WWDC 2016: Apple Pushes Back on the AI Narrative

Apple today held the first day keynote for its developer conference, WWDC. The comment below may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research. Jan is also on-site at WWDC and can be reached at jan@jackdawresearch.com or 408 744 6244.

As has become customary in recent years, the bulk of the keynote focused on iOS, but in some ways the star of the show wasn’t a particular product but Apple’s refutation of accusations that it can’t compete with Google and Facebook in artificial intelligence and deep learning. Both terms got shout outs during the keynote, and Apple highlighted several features which it said were based on these technologies. Apple has been accused of being behind in this area, and also of being handicapped by its privacy stance, but its on-stage demos today showed that it’s capable of competing effectively regardless. The changes to Siri should make it substantially more useful and effective as an assistant, and keep it competitive with alternatives from Google, Amazon, and others. Siri will also now be available on the Mac, but in a way that’s customized for the desktop experience. Given that Siri was already present on all other Apple devices, this was an obvious next step, and it remains to be seen how Siri will interact with the existing text-based Spotlight search function on macOS.

Apple Pay on the web should help to speed adoption for Apple Pay in a way that’s been more challenging with retail payments, where updated point of sale systems are required. Anything Apple can do to spread adoption of Apple Pay should help to push forward the cycle of adoption by merchants and users, so this is good news. Obviously, it’s dependent on adoption by retailers, so it will be important to watch how this goes over the coming months.

iOS

After more modest upgrades last year, Apple was back to making more significant changes throughout iOS this year. Aside from the Siri updates, Apple redesigned the lock and home screens, and provided significant updates to Photos, Maps, Music, News, the Phone, and Messages, among other things. Specifically, Apple has now turned Siri, Maps, and Messages into platforms, each of which expands the ways in which developers can make their functionality available. All of this raises again the number of things developers have to do to keep up with all the platforms Apple offers, but it also expands the number of opportunities for developers in areas of iOS which Apple has previously kept exclusively to itself. The Messages API in particular opens up opportunities for third parties to build new business models, but interestingly Apple won’t be trying to monetize its messaging app directly, instead leaving that opportunity to others, and presumably taking a cut of any in-app purchases. Combined, these new apps will also create new apps which will exist almost entirely as extensions within Siri, Messages, or Maps, rather than as standalone apps hiding behind an app icon, and that’s a fundamental shift in Apple’s app model. It began with content blockers and keyboards in earlier versions of iOS, but these changes will have a much more significant impact.

macOS

Aside from the name change, the biggest changes with Apple’s Mac operating system related to Siri, Continuity enhancements, and iCloud Drive changes. These should all help make macOS more useful and sticker for users, but they also build on Apple’s attempts to drive ecosystem lock in across devices, notably the iPhone and the Mac. Apple continues to move macOS forward in a way that focuses on how it becomes more useful when used in conjunction with its other devices.

WatchOS and tvOS

Apple also took the opportunity to update its two smaller operating systems, watchOS and tvOS. The updates to watchOS suggest that Apple understands the biggest frustrations with the first versions, and wants to address them even before it introduces new hardware, presumably in the fall. The new Dock is a recognition that the honeycomb of app icons is a poor model, while the Instant Launch capabilities should solve the single biggest frustration with using apps on the Watch. The new social features in the Activity app close an important gap relative to competitors like Fitbit, which have majored on the social and competitive functions of fitness tracking, and the wheelchair features build on Apple’s heritage of promoting accessibility. The biggest change to tvOS is single sign on for pay-TV services, which will again eliminate one of the biggest frustrations for those providers that support it.

T-Mobile’s Un-Carrier 11 Shows It’s Running out of Steam

T-Mobile today announced its “Un-Carrier 11” moves, the latest in a series of moves over the last several years designed to win new customers and increase customer loyalty. Today’s moves were mostly aimed at thanking existing customers, and were another sign that T-Mobile seems to be running out of steam in terms of making meaningful changes to the way the wireless industry works. The comments below may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research. Jan can also be reached at jan@jackdawresearch.com or (408) 744-6244. 

It’s hard to avoid the sense that T-Mobile is running out of really meaningful things to do to attract new customers. Its rate of postpaid phone adds has been falling year on year for a while now (although it’s still adding significantly more than the other carriers). It’s questionable whether stock ownership and free junk food will really make much difference in either retaining existing customers or winning new customers – this certainly isn’t likely to move the needle in terms of boosting phone net adds. The free GoGo is a nice perk, but you do wonder whether a mobile carrier should be aligning itself so closely with an Internet experience that’s generally pretty terrible. These latest Un-Carrier moves feel more like gimmicks than things that are likely to meaningfully improve people’s experience with T-Mobile, let alone attract many new customers.

Nest’s CEO Change Signals a Change in Strategy

Tony Fadell today announced that he was stepping down as CEO at Nest, the Alphabet subsidiary focused on the smart home. He will be replaced by Marwan Fawaz, who formerly ran the Motorola Home set-top-box and modem business before its sale to Arris. The comment below may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research. Jan may also be reached at jan@jackdawresearch.com or 408 744 6244.

On the one hand, the announcement comes a bit out of the blue – Fadell had seemed to be defending himself recently and holding on tight to the job, but it now appears he was mostly protecting his reputation and legacy, knowing that he was on the way out. Given the apparent tension between him and the Alphabet management over increased financial discipline on the one hand, and employee complaints on the other, his position was becoming pretty untenable, so it’s probably a good thing that he’s going. This should allow Nest to move on without the distraction of the recent news stories and criticisms.

One of the most interesting things about Fadell stepping down is how different his replacement, Marwan Fawaz, is. Whereas Fadell is legendary as a creator of compelling consumer electronics products, that’s not part of Fawaz’s DNA at all. He has very little experience in retail or consumer electronics, and instead is a guy that’s mostly sold products indirectly to consumers at best. That likely signals a change in direction for Nest, away from the retail model and towards more of a service model with a set of partners. There are references to service providers and enterprise channels in Fadell’s blog post today, and that also hints at a change in sales strategy for the company.

I actually think that’s very sensible – the retail model for the smart home seems pretty stuck right now, whereas the smart home as a service model seems to be doing rather better, and so Nest seems to be pivoting to the more promising part of the market. That will likely see Nest working with partners like telecoms operators, cable operators, security companies, and others to build Nest into smart home as a service-type offerings. The service models helps overcome some of the problems with the smart home market, including the high up-front cost and the challenges of installation, management, and integration. The other question is whether Nest starts to pursue more of a service model itself, either organically or through white-label relationships with third parties. Various similar models have been pioneered over the last few years by companies like Vivint, Alarm.com, and AT&T.

(For more on this model, listen to this week’s Beyond Devices Podcast episode, which happens to have covered just this dichotomy in the smart home market). 

Google Attempts to Close Competitive Gaps with I/O Announcements

Google today held its first-day keynote at its I/O developer conference in Mountain View, California. The comments below may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research. Jan is at Google I/O in person this week and may be reached at jan@jackdawresearch.com for further comment.

Google’s announcements at I/O appear focused on trying to close gaps with major competitors including Amazon, Facebook, and Apple. This includes trying once again to break into messaging and video calling, and playing catchup in the home speaker space pioneered by Amazon Echo. The technology looks good in principle, but there’s a significant risk that Google is coming into some of these markets too late to make a difference. On the other hand, its VR and Instant Apps announcements are more likely to provide leadership in new markets.

Google’s new assistant is its attempt to bring together a set of disparate efforts at Google that have lacked a coherent brand. Referring to the combined functions of Google Now, OK Google, and other elements has been tough in the past, because there wasn’t a single name for this functionality. Google now has that in the assistant, and is planning to extend into the home with an Echo-like device called Home, as well as into messaging with Allo. This should help Google compete more effectively both with Amazon’s Echo device but also with better-branded personal assistants like Siri, Cortana, and Alexa. Assistant is somewhat unique in how it will combine voice and text-based inputs in a conversational UI. But it also steers clear of the more human naming conventions that have become common for such products, which may make it harder for users to engage with it on a personal level, but also avoids some of the problematic issues with generally female-gendered assistants.

Allo also appears to tap into Google’s unique skills in a way none of Google’s messaging apps have in the past. This is a good step forward for Google, which has consistently struggled with making a meaningful contribution to the messaging space. However, it’s not clear that features alone will make a difference for Google – another area where Google has failed repeatedly is social apps, and getting a critical mass of users for Allo will be the single biggest challenge. Though the integration of the Google assistant is unique and attractive, if your friends aren’t on Allo, it won’t be all that useful. Both Allo and Duo suffer from landing in the market late compared to competing apps, at a point where it may be too hard to get people to switch from apps they’ve come to rely on, and which all their friends use.

This edition of I/O was notable for its lack of real news around Android, since Google previewed its N release a few weeks ago. That made the Android portion of the keynote feel flat compared to previous years, but it also made the real news stand out more. The main focus here was virtual reality, where Google’s new Daydream program should help move VR on Android beyond its current domination by Samsung and Gear VR. While Gear VR has helped pioneer Android on mobile devices, it’s also limited as an experience, with a problematic touchpad and a limited range of compatible phones. The Daydream program should help open up VR opportunities to additional handset vendors without the resources to create their own programs, as well as additional accessory makers. The VR market is still nascent, but over the next year or two we will start to see it become more mainstream, which will increase the pressure on Apple and other holdouts to make a play. On the other hand, the Daydream specs for phones set a fairly high bar, and it looks like no current Android devices will make the cut. New devices should be out in the fall, but this means Daydream-based devices will take some time to build scale.

Perhaps the most meaningful other announcement is the creation of Android Instant Apps. Google has already played with the app streaming model with a handful of apps that don’t have web equivalents, but this model seems to be more broadly applicable, and actually downloads assets to the phone. Unlike app streaming, Instant Apps doesn’t appear to be an attempt to get users to stay on the web, the domain Google prefers because it can show advertising. Rather, it seems to be an attempt to better serve users and developers by allowing them to borrow apps for brief interactions without the baggage that comes with a traditional app download. More importantly, it looks like Google will make Instant Apps backward compatible with phones running all versions of Android back to Jellybean, which covers 95% of active Android users today, versus just 7.5% running the latest version, Marshmallow. This is a model that has potential to significantly change the way at least certain kinds of apps work, and it’s good to see Google innovating in this way.

Microsoft’s Phone Strategy Continues to Unravel

Microsoft today announced that it will sell its feature phone business, acquired from Nokia in 2014, to a combination of Foxconn and a new entity led by former Nokians. The comment below may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research. Jan may be reached by email for further comment at jan@jackdawresearch.com.

The sale of the feature phone business – especially for so little – is just the latest step in what’s been almost a complete unraveling of the strategy behind the original acquisition of Nokia’s devices business. The feature phone business was not the main target of the acquisition, but Microsoft attempted to justify acquiring it as part of the deal on the basis that it would provide a funnel for customers to upgrade to Windows Phones. Of course, that never really happened, and Windows Phone has largely been a disaster since the acquisition too. It’s hard to see the acquisition as anything but a complete failure at this point, and Microsoft has already admitted as much with the large write-down it took in July last year. The feature phone business has been in decline ever since the acquisition closed, as the chart below shows, but Microsoft still sold over 80 million feature phones over the last year (compared to just 21 million smartphones).

Microsoft feature phone sales

The press release does seem to suggest that Microsoft will support existing Lumia devices but not necessarily release any new ones. There are two ways to read that, one of which is that Microsoft is giving up on the smartphone business too, and the other of which is that Microsoft just plans to brand any future smartphones differently. For example, there’s been a lot of talk about a potential Surface phone in the future, so the wording of the announcement still leaves that door open. But you would have thought Microsoft would have been clearer about its future smartphone plans if that really was the case. It’s notable that the press release doesn’t say anywhere that Microsoft will continue to make smartphones. It’s certainly the latest indicator of how Microsoft’s commitment to its smartphone business has waned over the last couple of years.

Twitter’s NFL gamble

Bloomberg broke the news this morning that Twitter is the winner of the digital rights package of Thursday night games the NFL has been auctioning off recently. Twitter came out of left field (if that’s not the wrong metaphor for this particular sport), and it’s worth thinking about both why Twitter would want this deal, and what the implications might be. The comment below may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research, and Jan may also be reached at jan@jackdawresearch.com.

Firstly, we know now that Jack Dorsey really is serious about making live – and live video specifically – a focus in 2016! So far, Twitter has been used almost entirely for people to talk about live events being broadcast on other platforms, which has meant it hasn’t been able to benefit as directly as some other players from those live events, even if massive numbers of tweets were sent and even shown on television. Last night’s NCAA Championship basketball game is a great example of this. This deal suddenly gets Twitter directly into the business of showing these games and tapping into some of the additional associated revenue opportunities. It also significantly ups Twitter’s live video game from short, grainy videos to professionally produced content.

One of the most interesting things is going to be seeing how this fits into the Twitter product – with all the other bidders, there were obvious existing platforms for broadcasting NFL games, but with Twitter they’ll have to create a completely new home for this kind of thing. It’s possible they might use Periscope, but given the poor quality of most Periscope videos until now, I would think the NFL might have qualms about having their high-quality content appear there. Now that the news is out from the NFL, with comment from Twitter, we know that Twitter is describing the experience as being “right on Twitter,” but I’m curious to see the exact implementation.

The other big questions is how Twitter will do selling ads against this content – it’s obviously a very different type of advertising from what they’ve sold before, but it gives them their first real opportunity to cross-sell these different types of ads and break into television advertising for the first time. It may also be a first real opportunity to make really good money from the “logged-out users” Twitter has been talking up for so long, but who are so hard to advertise to effectively.

And then there’s the question of how much Twitter paid for the rights here. It’s hard to guess at because this package of rights is very different from any other similar package sold before – non-exclusive in the US, but exclusive internationally. But almost no matter what the exact number, it’s likely to be a meaningful fraction of Twitter’s overall revenue. That’s one of the reasons Twitter is such a surprising bidder (and winner) – it’s a much smaller company than most of the other names that were bidding, with just over $2 billion in revenue last year. If the rights costs in the hundreds of millions of dollars, which seems likely, then they may well cost 10-20% of revenue. That’s a huge gamble, and we all know the gamble didn’t pay off for Yahoo. The strangest thing is that the Twitter Investor Relations account tweeted this morning that all expenses associated with the rights are already baked into its guidance for the year. That seems particularly odd given that Twitter likely didn’t know whether they’d won the rights yet when they announced their guidance, and it’s a material amount of money.

AT&T Brings Down the Broadband Overage Hammer

AT&T today announced that it would begin enforcing the cab on U-verse broadband usage it’s had in place since 2011, and at the same time raised the cap while providing new options for buying unlimited broadband. The comments below may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research. Jan can also be reached at jan@jackdawresearch.com or (408) 744-6244. 

AT&T’s announcement is another sign of the ways in which it intends to leverage its DirecTV asset to cross-sell services. The offer of unlimited broadband for those who take either U-verse or DirecTV on the same bill as U-verse broadband is clearly intended to incentivize subscribers to both take that bundle of services and to consolidate their billing relationship with AT&T. However, the enforcement of the usage cap is a sign that AT&T doesn’t want customers cutting the cord on pay TV and then using their broadband for significant video consumption. AT&T says around 4% of its customers will fall afoul of the new caps, and there’s likely a very high correlation between these customers and those who don’t take pay TV and instead consume mostly Internet video. That online video habit will now either cost them $30 for unlimited broadband or an upgrade to a more expensive broadband package with a higher cap.

AT&T is spinning this move as being about choice, but there continues to be no evidence that modestly heavy usage of broadband plans actually incurs more incremental cost or puts any strain on landline broadband networks, especially those of recent vintage like AT&T’s U-verse. As such, it’s going to be hard to sell this to consumers as anything other than a money grab on AT&T’s part.

Apple Kickstarts the Upgrade Cycle with New Devices

Apple today announced several new products, including a smaller iPhone and a revamped 10-inch iPad. The comment below may be attributed to Jan Dawson, Chief Analyst, Jackdaw Research. Jan may also be reached at 408 744 6244 or jan@jackdawresearch.com and is on-site at the Apple event in Cupertino.

Apple’s announcements today are best seen as attempts to kickstart the upgrade cycles for both iPhones and iPads. Larger iPhones are still selling in huge volumes, but there’s considerable evidence that some of those who own smaller iPhones are holding onto them rather than upgrading to the new, larger iPhones. Apple announced during the event that 30 million people had bought 4-inch phones in 2015, but the more significant number is all those who own smaller iPhones but haven’t bought one since the larger devices launched. There’s significant pent-up demand within Apple’s base of iPhone owners who want a smaller iPhone with up-to-date specs and newer features. The iPhone SE is designed for this group, and should unleash a decent upgrade cycle over the coming months. During a period when iPhone sales overall have slowed following a massive upgrade cycle driven by the iPhone 6 launch, a few million more sales in the quieter spring and summer months should help Apple close the gap with last year’s sales numbers. The $399 pricing suggests Apple really wants to sell this thing in large numbers, and the mix of features and pricing compares very favorably with the iPhone 5S, which it replaces in the lineup.

However, it’s worth noting that this pricing doesn’t get the iPhone down to the kind of prices needed to really spur sales in emerging markets, where older devices have been on sale for some time at similar or lower prices. In many of those markets, prices need to come down more significantly to make a real difference, and it’s actually the larger-screened devices that will meet users’ needs there better, rather than a new 4-inch device. As such, it will likely be refurbished iPhone 6 and 6S models which will be used to attract new customers in these markets, and not the iPhone SE, at least for now.

The new iPad Pro is an evolution of the iPad’s identity. The iPad has always been first and foremost a consumption device for the vast majority of users. That started to change with the 12-inch iPad Pro last year, which was the first to really go after a productivity-centric target market aggressively. The change in naming for the mid-sized iPad is an indication that Apple really wants to go after the productivity market in a bigger way, by aiming its most popular iPad model at that segment. This is a move designed to boost upgrades, as it will be the first really meaningful change in what the 10-inch iPad can do in several years, but it’s also intended to spur new people to buy an iPad to replace or augment a laptop they may have used in the past. At the event, Apple highlighted the 600 million PCs in use that are over 5 years old and pitched the new iPad Pro as the ultimate PC replacement. There was a serious clue that Apple was moving in this direction when it introduced the 12-inch iPad Pro last year, as Tim Cook referred to that device as “the clearest expression of [Apple’s] vision of the future of personal computing”. If that was the case, it was obvious that more of the iPad line (and perhaps the rest of Apple’s product line) would move in this direction.

However, all of this also means a change in the identity of the iPad line – the people who will buy an iPad Pro going forward will in some cases be different people, and in many cases will be buying them for different reasons compared with past iPad purchases. It also raises the price of new 9.7″ iPads by $100. That leaves questions about the role of the lower-end iPads in the lineup, including the aging iPad Air and the iPad Mini. If these never get upgraded or get upgraded less frequently it may signify that Apple is moving on from this part of the market, or at least sees it as less important going forward. This, in turn, may well further depress sales of iPads even as the new iPad is clearly intended to boost sales. On the other hand, the iPad Air may just get a two-year upgrade towards the end of this year, and that should reassure customers that the iPad Air line is sticking around and will continue to receive investment.