Sunday, April 12, 2015

Will the Fixed Network Be Relevant, and if so, How, by 2030?

There are a few questions which might engage many observers of the telecom business.

The first: will cable TV companies emerge as the dominant suppliers of fixed network services? In the U.S. market, for example, cable companies have the dominant market share in both video entertainment and high speed access, with a substantial position in voice services.

The second question: will “dominance” mean much, if and when mobile networks are able to match fixed networks for features and functionality, such as headline speed?

A third question is whether higher cost telcos will continue to invest aggressively in their fixed networks if financial returns are better in mobile and international arenas, especially if no amount of investment allows them to “catch” cable operators?

Some insight on the answer to the first question has been provided by Comcast, which is upgrading all 21 million customer locations to gigabit access speeds by the end of 2015. Comcast also plans to make 2 Gbps service available to 18 million customer locations as well, by the end of 2015.

In fact, some have argued that U.S. cable TV companies eventually would emerge as the dominant fixed line suppliers of communication services for consumers, as telcos--with higher fixed and operating costs--simply could not compete.

In many ways, that already has happened: telcos no longer are dominant providers of fixed network services for consumers.

At the end of 2012, incumbent local exchange carriers (telcos) had 34 percent share of the consumer voice market, 14 percent of the high speed access market and 10 percent of the video subscription market.

In fact, some might argue that cable TV operators are destined to dominate consumer high speed access. Others might argue a long-term duopoly, nationally, will exist, with Comcast and AT&T having dominant market share in different markets.

Some might argue that AT&T and Verizon have cost structure issues that will continue to hamper their fixed network operations. That is one good reason why effort and investment have shifted to mobile operations.

Telcos might not be able to match Comcast’s 2 Gbps high speed access offer easily, as they will find 1 Gbps challenging on a sustainable basis. The issue is the business model, not the technology. In competitive markets, the low-cost provider tends to win Telcos are almost never the low-cost providers.

The second question might be more meaningful sometime after 2020, when fifth generation mobile networks are commercialized. If performance matches present plans, end user bandwidth will be as high as 10 Gbps and latency as low as one millisecond.

At that point, it might reasonably be argued that the mobile network is superior to fixed for nearly any imaginable application. To be sure, prices, terms and conditions of service will matter greatly.

But, for the first time, it might be reasonable to say the mobile network actually outperforms the fixed network.

The third question also is germane. It seems unlikely most telcos will be able to match the speeds, the deployment timetable or investment cost, not when better returns are available in mobile and internationally.

Under such conditions, would a rational strategy not entail harvesting the fixed network, while putting most new investment elsewhere?

Consider what has happened in the voice business, even the mobile segment. Mobile has displaced the fixed network as the way most people want to use voice services. Some consumers are starting to do so for Internet access, already.

About seven percent of U.S. residents own a smartphone but do not buy fixed network high speed access service at home, and therefore rely on their smartphones for access. That data point provides some evidence about consumer ability to substitute mobile access for fixed Internet access.

About 15 percent report they have a limited number of ways to get access to the Internet aside from using their phones, according to a study conducted by the Pew Research Center.

Today nearly 66 percent of U.S. residents own a smartphone and 19 percent rely to some degree on a smartphone for online access.

It could get worse for service providers.

Separately, a U.K. survey found that 33 percent of mobile phone users claim they do not use voice at all.

“Voice” or “making phone calls” were not on a list of the top 10 most-used mobile phone features in a recent poll of 1,000 people in the United Kingdom, conducted by Oxygen8.

Granted, the online poll appears not based on a randomizing process, so likely is not representative of the “typical” user, but the results are a surprise, nonetheless.

The point is that very big questions loom for fixed network service providers. It isn’t clear that the telco role is stable. It isn’t so clear that telcos “ought” to invest in fixed networks, when other alternatives, especially those where they might challenge other fixed networks, are feasible.

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