What is the Future of the Fixed Network?

Anybody familiar with the underlying trends in the communications business, and who looks at the business dispassionately, sooner or later has to wonder what the future of the fixed network actually will be. That is not to say the fixed network has no obvious role.

Bandwidth, and affordable bandwidth, is the chief advantage a fixed network has, and always will have, over a mobile or wireless network. But that isn't a terribly comforting thought for a fixed network executive, or any of the ecosystem partners. For saying "bandwidth is the enduring value" is tantamount to saying that "dumb pipe" is the enduring value.

That is not to say that applications are unimportant. Video entertainment and voice are key revenue generators for fixed networks. But the irreducible core of value is the "access to the Internet." At the moment, the U.S. Federal Communications Commission even enforces the "dumb pipe" model by barring fixed networks from providing quality of service distinctions.

In other words, fixed network service providers specifically are prohibited from creating and selling "smart pipe" Internet access that can prioritize voice and real-time applications over others. "Managed services" such as carrier voice or entertainment video thankfully are exempted from those rules, but the point remains: dumb pipe is the unique and enduring value provided by a fixed network.

 No other network--satellite, fixed wireless or mobile--can claim to match the theoretical bandwidth of an optical fiber network. And no other network can match the price-performance of a fixed network at very-high speeds. You don't hear proponents talking about mass deployment of gigabit per second wireless or satellite networks, for example, because it is not technologically or economically possible. 

Some think that could change in some decades, but for the moment fixed networks have the strategic advantage. Some of us would argue that growing use of Wi-Fi-supported devices such as tablets and smart phones will enhance the value proposition for fixed networks.

The increase in number of devices using the home networks is one reason why “median monthly usage” (half of consumers use more, half use less) on North America’s fixed access networks has increased from 10.3  GB to 16.8 GB in the second half of 2012.

Over the same period, “mean monthly usage” (arithmetic average)  grew by over 70 percent increasing  to 51.3 GB from 32.1 GB. Growing subscriber consumption is not limited to North America or fixed networks, either.

Relatively slow growth of mobile data consumption probably is a direct result of the shift to offloading of mobile data demand to the fixed network.

In North America, monthly usage on mobile networks has experienced only minor growth, Sandvine says.  In the second half of 2012, Sandvine has observed mean monthly usage increasing moderately from 312.8 MB to 317.2 MB.

More noticeable change can be seen in the median which has increased to 32.9 MB from 25.5MB just six months ago. But it also is possible that new smart phone consumers account for some of the slower growth of mobile data, as newer users tend to consume less data than experienced users.

As you would guess, consumption of entertainment video and audio remains the largest
traffic category on virtually every network examined. North America continues to lead in adoption of this traffic category, with almost two thirds of downstream traffic during peak period being streaming audio or video.  

Netflix now accounts for 33 percent of peak period downstream traffic, Sandvine notes.

Mobile data consumption increased only slightly, very likely a direct consequence of people using at-home Wi-Fi. From a traffic distribution standpoint, the top one percent of mobile data subscribers account for 23.9 percent of total upstream traffic.  

The top one percent of downstream users account for 18.7 percent of bandwidth consumption.

The mobile network’s lightest 50 percent of users account for only 0.8 percent of total traffic.

So the value of fixed networks is assured. What is not clear is how the economics of operating a fixed network business might have to evolve, though. Video and high speed Internet access are two apps that the fixed network is ideally suited to supply.

The unique value proposition drops sharply after that, as voice and messaging would seem better supported by mobile devices. Fixed mobile substitution therefore is a key issue. But mobile offload is the countervailing development.

If telcos can get their cost structures revamped, broadband would seem to offer the highest profit margin of any potential service, long term.

Video entertainment margins will be lower since gross revenue has to be shared with program suppliers.

Still, the move to use of "untethered" devices does not mean a move to use of "mobile" networks in a linear fashion.

Once upon a time, consumers and businesses primarily used fixed networks for all communications. These days, mobile networks are used as much, or more. But even "mobile" devices are used mostly at home, or at the office, on Wi-Fi networks that are a logical and direct extension of fixed network service.

That provides one obvious clue about the future value of the fixed network. Though mobile broadband and voice might be sufficient for many people, much of the time, the value-price relationship will, in all likelihood, "always" favor untethered use of the fixed network.