Thursday, June 16, 2016

No Business Model for 5G?

It always is difficult to fully anticipate the business value provided by each successive generation of mobile networks. There always is a stated business case, of course. From the first generation to the second, the advantage was the transition from analog to digital, with the advantages that normally represents.

The shift from 2G to 3G was supposed to be “new applications.” That eventually happened, but not right away. First mobile email and then mobile Internet access were new apps of note, though the use of mobile hotspots also was an important development.

The shift from 3G to 4G generally was said to be “more bandwidth” supporting new applications.

Video apps generally have been the most notable new apps, compared to 3G, although user experience when using the Internet also is far better with 4G. And though it often goes unnoticed, 4G speeds have allowed any number of users to substitute mobile for Internet access.

More U.S. households now seem to be abandoning even fixed Internet access in favor of mobile access, as it now is common for households to rely on mobile voice (more than 46 percent of U.S. households now are “mobile only” for voice) , instead of fixed network voice, or over the top video entertainment in place of traditional subscription services.

In fact, because of mobile use, fixed network Internet access rates actually are dropping in the United States, having reached an apparent peak in 2011.

Still, it is reasonable to argue that there is not yet a clear business case for 5G. But some might argue that has been the case for at least two successive generations of mobile networks. Both 3G and 4G were supposed to lead to development of many new apps.

That has happened, but mostly because of the contributions of third party app developers. On the other hand, both 3G and 4G have offered efficiency gains, something of clear importance for a mature business featuring high competition and therefore margin pressure, plus declining revenue from the legacy apps.

“The business reality is that there is no new money,” argues William Webb, CEO of Weightless SIG and a communications consultant. “So either 5G will need to be delivered within the confines of current operator revenue or it will need to deliver new services that consumers are prepared to pay more for.”

To some extent, both requirements (“no new money” and “new services needed to boost revenue”) likely will be part of the eventual business case.

Actually, one might argue that the percentage of household income devoted to mobile communications actually has grown over the last decade. So there actually is some amount of “new money” being devoted to mobile services, even if that comes with less use of other services, such as fixed network services.

To be sure, U.S. consumer spending on communications is a relatively small portion of household spending, too small to be broken out by the Bureau of Labor Statistics, for example.

In most U.S households, and definitely for households with more than the “mean” number of household members (2.5),  spending on mobile services virtually certainly outpaces spending on all other services, as well as topping spending on component subscriptions (high speed access, all entertainment video and fixed network voice).

From 2007 to 2014, expenditures for mobile phone services increased from a range of 38.7 percent for one-person consumer units to 70.9 percent for consumer units of five or more persons, according to the U.S. Bureau of Labor Statistics.

Also, mobile now represents 73 percent to 80 percent of total household spending on communications.

One-person consumer units have the lowest share of cellular expenditures compared with telephone service expenditures for all household size groups, but the share increased from 49 percent in 2007 to 64.3 percent in 2014.

In contrast, fixed network voice accounted in 2014 for just about 27 percent of household spending. The perhaps-obvious question is how much is spent on high speed Internet access, something hard to glean from Bureau of Labor Statistics data.

More significantly, BLS data shows that U.S. household spending on communications is growing, and has been growing since 1990.

In the United Kingdom, households spend between three percent and four percent of income on communications.

Source: Ofcom

In households with five or more people, mobile accounts for about 80 percent of spending on “telecommunications.
The other issue is whether new services will develop that generate more revenue. That is an open question at the moment. But many argue that Internet of Things apps will drive additional service revenue, while customers are showing willingness to spend more money for faster Internet connections, as well.

Of course, there are regional variations. Average revenue per user, or per account, has shrunk in Western Europe, but climbed in the U.S. market.

And there are other complications. Smartphones tend to have much higher ARPU than tablet connections. Internet of Things connections are expected to have lower ARPU than tablets. So revenue per account and revenue per connection will diverge.

In my own household, ARPU (per device) is relatively stable, but the revenue per account has grown, as more devices have been added, and bigger usage allowances have been purchased.

The point is that there is evidence of growing household spending on mobile services, and at least a pathway to new spending on new services. There will be a business model for 5G. It might take some time to develop in a clear way, though.

The other angle is that mobile networks get replaced about every 10 years, so the revenue from the older generation of networks is captured, and built upon, by the new network.

In other words, revenue shifts from older networks to newer networks, which also tend to be more efficient, and therefore less costly. That tends to be the case even under new circumstances, where legacy revenue sources are replaced by new sources.

Mobile voice and messaging revenue, for example, is dropping in many markets, but mobile Internet access revenue is growing. The issue is the magnitude of blended revenue.

Even without knowing the particulars, some of us would argue that, as a shift to gigabit access in the fixed network will lift ARPU, so too will gigabit access in the mobile network.

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