Monday, April 10, 2017

Can You Build a Business Model on Internet Access Speed?

Can a service provider build a 5G business model on speed? Some might say the answer is “no.” In fact, that likely is the majority opinion at this point. In fact, that is why 5G is seen as the first mobile network that might build revenue substantially beyond services to people who want to talk, text or use the internet.

On the other hand, there are some potentially important revenue segments where 5G speed might be precisely the foundation for a business model of some size. We might take as a given that speed alone will not provide a sustainable advantage within the mobile ecosystem, as all leading providers will adopt the standard.

But that same improvement in speed (up to gigabits per second) will open up a significant opportunity in the wireless substitution market that already has seen mobility become the preferred method of using voice services.

Some idea of the potential market share shift can be seen in the fixed network internet access business in the United States, where distinct platforms operated by telcos and cable TV operators have vastly-different “typical speed” profiles, with serious consequences for market share.

Leichtman Research Group, studying the 14 largest cable and telephone providers in the United States, says the top cable companies netted 122 percent of the broadband additions in 2016 -- compared to 106 percent in 2015, and 89 percent in 2014.

In other words, since 2015, cable companies have gained all the net growth  in the market, after taking most of the market in 2014.

The reason for that shift is “speed,” namely the ability of cable operators to dramatically boost speed, compared to telcos, fast and at reasonable cost. That trend began in 2006, when cable operators began to deploy their new DOCSIS platforms at a time when fiber-to-home deployments on the telco side were restrained.

So it is possible to build a business model on “speed,” but only when key competitors cannot match the faster speeds. That likely will not be the case within the 5G mobile markets, but could be an issue in the fixed access markets, where mobile services might for the first time be competitive with cable offers.

That could have market share and business model implications. Telcos might be able to compete more effectively with cable, principally by closing the speed gap. Also, for some tier-one mobile operators, the addressble market grows substantially.

Today, Verizon and AT&T have fixed networks that cover only a portion of total U.S. homes. Using the 5G network, they will be able to compete nearly nationwide. That is a big deal.

Telcos might find they do not have to spend so much capital to upgrade their networks in their existing footprints.

On the other hand, telco fixed networks will face even greater financial pressures, as mobile and wireless become better alternatives almost immediately.

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