Mobile and Fixed Network ISPs Face Different "Key Challenges"

You likely could get a good argument about whether fixed network or mobile network operators face tougher financial challenges balancing revenues and network costs, over the next decade.

Both types of networks will have to be upgraded to handle expected bandwidth demands, and yet both fixed and mobile network businesses are likely to face significant revenue challenges, at the same time.

You might be tempted to argue mobile service providers are better situated, even if the financial pressures on mobile operators have to “tear apart their network economics,”  along with their network architectures, Maravedis-Rethink.

“Operators will slash costs by leaving only ultra-low cost equipment at the cell site, eventually driving the equipment cost down below $100 by 2020,” Maravedis-Rethink analysts argue.

New mobile network architectures will rely much more extensively on huge numbers of smaller cells, where today the network is characterized by a smaller number of macro cells, says Caroline Gabriel, Maravedis-Rethink research director.

The big story here is the $100 cell site radio infrastructure, part of the deconstruction of the transmission infrastructure to radically reduce costs.

A 2011 study by Juniper Research predicted that global operator-billed revenues will exceed $1 trillion annually by 2016,  but that operator costs would exceed revenue within four years unless changes are made.

Many would argue that service providers are smart enough to revamp cost structures even as they work on generating higher revenues. Some might argue that users already have learned to shift as much as 80 percent of data consumption on their smart phones to Wi-Fi networks.

Small cells are seen as one way to offload even more traffic, in outdoor spaces, from the mobile network.

Fixed network operators arguably face a different sort of problem. The ability to reduce the capital intensity of a fiber to home network argubly is vastly less than what a mobile operator could do.

But the big challenge probably is not “network cost” so much as a destabilizing change in end user expectations about value and price relationships, namely the challenge of a competitor selling 1 Gbps service for $70 a month. To be sure, few ISPs actually face the problem today.

AT&T, which says it is beginning construction of its gigabit network in Austin, Texas, might reach the gigabit standard at some locations by mid-2014.

AT&T says it is starting with “tens of thousands” of customer locations throughout Austin and the surrounding areas at the end of 2013 (300 Mbps), with additional local expansion planned in 2014, though no specific targets were immediately revealed.

But AT&T also faces a problem Google Fiber does not, namely an installed base of customers whose perception of what a reasonable Internet access offer looks like will change, if AT&T starts selling gigabit connections for prices anywhere close to what Google Fiber offers.

The problem is the same as AT&T and other telcos faced when VoIP began to get traction in the market. Telcos had scores of millions of legacy voice accounts sold for healthy premiums compared to many of the upstart VoIP providers.

So the strategic challenges was simple: match VoIP prices and features, or essentially refuse to match those offers and face erosion of accounts. One might argue that is not smart, but the math works.

Instead of taking an across the board revenue hit on all existing lines, telcos mostly decided to lose market share over time, while maintaining prices on a dwindling customer base. To be sure, customers were deserting in any case for mobile alternatives.

AT&T will face the same issue with gigabit networks, as the new value-price relationships will be reset, by its own gigabit offer and Google Fiber and other offers that are hovering around a 1-Gbps for $70 to $80 retail pricing range.

That of course has implications for the value-price relationship for the 300-Mbps service and all other slower speed services, which essentially will be priced in relation to the 1-Gbps service.

Google Fiber, for example, already has done so. Customers can sign up for free 5 Mbps service, guaranteed for seven years.

In other words, the big problem for a growing number of ISPs is different expectations on the part of consumers. Few consumers may want to buy a gigabit service costing $300 a month or more.

Many will pay for a gigabit service costing $70 to $80 a month. One survey suggests 50 percent will buy Google Fiber at rates in that range.

So while the bigger problem for mobile service providers might be new ways to dramatically boost capacity while controlling cost, fixed network ISPs can do only so much on the capital investment front, but face unprecedented pressures on the retail pricing front.

Where today fixed network customers expect to pay $50 for service up to 15 Mbps or 20 Mbps, or perhaps $80 for 50 Mbps access, that obviously will have to change when the ISP is confronted with a rival ISP selling gigabit connections for $70 to $80.

For mobile service providers, the key challenges arguably are related to network cost. For fixed line providers, the key challenge is pricing pressure.