Monday, July 31, 2017

Verizon Makes Huge Innovation in Fiber-to-X Network Designs

Mass market optical fiber designs do not change radically, very often, in the U.S. market. Over a process of three to four decades, we have settled into some clear design buckets, including the cable TV hybrid fiber coax network; fiber to the home (FTTH) and fiber “to the neighborhood.”

There has been a shift from active to passive designs for FTTH, but the fundamental choices have been fairly well understood for some time.

But give Verizon credit for making a huge innovation that recasts the whole "fiber to the premises" issue. You might argue the change separates the entire issue of drop (access) media from the issue of how to build trunking networks.

The new fiber-deep design essentially builds a multipurpose optical distribution network (trunking network) and leaves the actual drop media decision for later (supporting either optical access for business or wireless access).

Verizon now is building the fiber-deep trunking network in Boston, and likely will follow in other areas.

We do not yet have a well-understood and generally-accepted moniker for the design, which basically installs cables with huge numbers of fibers, virtually ubiquitously (to locations representing about every light pole, in principle).

“The architecture that we're building in Boston, and now in other cities around, is a multi-use” fiber-deep design, Verizon says, where “every light post becomes a potential small cell for 5G.”

That same network is designed to have enough fibers to handle enterprise connections, small business and also serve as the small cell foundation for mobile and fixed consumer access.

If Verizon is correct, then the economics of gigabit internet access for consumers will change significantly, not least because the optical fiber distribution cost is partially defrayed by revenues earned by serving enterprise and business customers, as well as the mobile small cell network.

The drops for gigabit consumer services then will be fixed wireless, using unlicensed or lightly-licensed spectrum. The implications for consumer gigabit access could be huge.

It remains to be seen if the actual cost of a fixed wireless connection using 28 GHz and 39 GHz assets will actually be “miniscule,” as Verizon executives have suggested. But Verizon already believes it can deliver gigabit speeds at distances of perhaps 1,000 feet or so.

That is important since street lights are spaced at distances from 100 feet (30.5 meters) to 400 feet (122 meters) on local roads. In principle, putting radios on every other light pole could mean a radio radius of about 200 feet to 800 feet, well within tested propagation ranges. Putting radios on every light pole would shrink the radius to 100 feet to 400 feet, and allow for more path diversity, in case of obstructions.

If, as some others expect, millimeter wave small cells have a transmission radius of about 50 meters (165 feet) to 200 meters (perhaps a tenth of a mile), it is easy to predict that an unusually-dense backhaul network easily can support radio drops from small cell networks that could number as many as 100,000 in an area such as Manhattan.

That fiber to the light pole network would be the first major innovation in fiber access networks for decades.

Boot Camp for a Radically-Different World

The non-profit PTC has for some time held training events for mid-career professionals. This year, for the first time, PTC has organized a week-long program of value to promising members of regulatory and policy organization staffs.

At the Industry Transformation Boot Camp (including Spectrum Futures and PTC Academy), students will learn:

  • Strategy for a business consolidating from 810 service providers to 105, in 10 years
  • What drives the change
  • What industry structure will emerge
  • How revenue will be earned
  • How 5G sets the stage
  • Who wins, who loses, as part of the change
  • How to prepare for the changes

The educational event earns students a certificate of completion, and also immerses them in tutorials and case study exercises preparing them for the most-rapid transformation of the telecom industry in half a century.

The week-long training event, including Spectrum Futures and PTC Academy curricula,  especially is designed to train top-level and mid-career staff on what is coming and why.

Full week discounts are available, especially for organizations who may wish to send several staff members.

Email to discuss the Boot Camp program.

If I Do Not Buy a Tesla, Is that a Supply Problem?

If a particular product is widely available, and yet consumers do not want to buy it, is that a market failure, or simply a reflection of consumer choice? That is among the potential issues report on U.K. internet access might raise when it is released.

Initial reports suggest the report will show a wider availability gap than prior reports have suggested. That might be a methodological issue, many argue, as the report conflates availability with take rates. In other words, it mixes demand and supply metrics when it ought to measure either supply or demand, but not both, as a single measure.

That is important. To use a common example, I might choose not to buy a Tesla, even when Tesla availability is not an issue. That is not a market failure. That is a consumer choice.

In other markets, such as the United States, there is likely to be continuing gap between locations that can buy a gigabit internet access service, and accounts or locations that choose to buy.

When gigabit internet access service becomes widely available, it is possible, perhaps certain, that most consumers will choose to buy some other tier of service, where it is available, on entirely reasonable grounds. They might simply conclude that some other lower-speed option satisfies all their needs, at lower price.

Some observers will use more-stringent criteria for evaluating adoption, such as including retail price (“affordability”) in addition to availability as a measure of “success.” There is logic to that approach, as well. Perhaps a more-refined way of making such measurements is to compare internet access price to household income, stipulating that access should not be more than X percent of such income.

Yet others might add the additional criteria of multiple providers in a market as a criteria for success.

The point is that there are many potential criteria for assessing the success providers have had at getting fast internet access to market. Availability matters.

But once supply is in place, demand takes over. The actual percentage buying a particular offer is less important.

In coming years that is likely to be more important, as mobile internet access increasingly becomes a full substitute for fixed internet access.

Can Telecom Industry Afford its Coming Consolidation?

While there always are lots of reasons why a particular merger idea does not get traction, one is worrisome for any weaker firm: potential acquirers believe the asset is going to depreciate further.

That, in fact, is one strategy some have floated for “when” to make a bid to acquire Sprint, or any other major set of telecom access assets.

Not now” is the rationale some would put forward, even if a later bid makes sense. Some would argue Sprint has not stabilized its business. Others might argue the asset will be available for less money, later, because they sense Sprint cannot fix its problems.

That is likely to be a growing issue over the next decade as a huge wave of consolidation starts to sweep over the telecom industry. At a high level, here is the problem. It will take huge amounts of capital if 85 percent of today’s telecom assets are acquired over a 10-year period.

One can question whether enough borrowing power exists to get that done, if at the same time capital is plowed into building new 5G networks and, at the same time, tier-one providers make investments in new businesses “up the stack” that are meaningful contributors to present or future revenue streams.

Assume, as a figure of merit, that a telecom company can be purchased for about twice its annual revenue. Assume annual telecom industry capex is about $355 billion, but that these amounts are going to be needed to build the coming 5G networks, as well as maintain existing networks.

Assume annual industry revenues are in the range of $2.4 trillion. Assume 85 percent of total assets are acquired over a decade. That suggests $2 trillion of revenue. At a multiple of “two times revenue,” that implies an investment of about $4 trillion over a decade, to consolidate 85 percent of today’s assets.

Assume global telecom debt stands at a bit less than $1.5 trillion. Assume half of the consolidation is comprised of no-cash mergers of equals. That leaves about $2 trillion of new debt to be funded. In other words, global service provider debt would more than double over a decade.

You can make your own decisions about whether that is possible, much less a workable scenario.

Some of us might argue that new debt load does not account for any investments in new lines of business at the application or platform layers (content, apps, middleware, operating systems).

Assume such investments eventually have to be made at a significant level to have any hope of affecting telecom service provider earnings. Assume that means a level of investment at least as large as the investments in horizontal scale.

That implies an additional debt load of perhaps $2 trillion, for a total new debt load of about $4 trillion.

For an industry that arguably will have issues covering $1.5 trillion in debt, you might wonder whether it is even conceivable that lenders will approve debt levels of as much as $5.5 trillion.

But there is one way to reduce some of the debt burden: a collapse of equity values, which makes the acquired assets much less expensive. That will be the case, earlier, in markets where assets become “distressed” sooner rather than later.

Sunday, July 30, 2017

Verizon Touts Shift to Fiber Products, Net Growth is Nil

“Organically, fiber-based products grew more than three percent” (in the second quarter of 2017) said Matthew Ellis, Verizon CFO. Many will interpret that as a sign of clear progress for the FiOS network, and it is, in many respects.

One always has to evaluate “new” revenue from next generation platforms on a “net” basis, as is the case for other statistics such as mobile account gains. The simple reason is that a legacy or incumbent provider mostly finds that the next-generation platform cannibalizes some existing revenue, while hopefully creating incrementally-new revenue streams.

So it is with Verizon’s fixed network operations. “On an organic basis, wireline segment revenue decreased 2.8 percent compared to a decline of 3.2 percent last quarter,” said Ellis. “This shift in the wireline revenue trend towards fiber is growing.”

So FiOS and fiber-based revenue was up three percent, while segment revenue was down 2.8 percent.

In the fixed networks business, a good example of the former is consumer shifts from digital subscriber line to optical fiber or fixed wireless services. When a current customer takes the newer service, but drops the older service, there is zero net account change.

That is going to happen for most human 4G accounts, which eventually will be dropped for 5G accounts, again with zero net change, even if headline numbers will trumpet the growth of 5G subscribers and accounts.

On the other hand, next generation platforms sometimes clearly create new incremental revenue streams. Video entertainment services--not possible on a narrowband network--is the best example in the fixed network realm.

Video also is arguably the best example of a new capability for 4G, compared to 3G, although others might point to tethering or general web access as other areas where there are indirect but key differences from 3G capabilities.

The key challenge for 5G is the magnitude of new revenue that can be created from new services beyond replacement of existing 4G use cases.

Saturday, July 29, 2017

Value is What the Customer Says it Is

In the end, “value” is always what the customer says it is, even if suppliers spend lots of time trying to shape those perceptions. Consider “gigabit per second internet access.” That’s better than 40 Mbps or 100 Mbps, right?

As with all “you would rather?” or “which is better?” exercises, nothing much matters until price is part of the decision matrix. I would tell you a Tesla is better than a Hyundai, but that is an abstraction. The chances I’d actually buy a Tesla, compared to a Hyundai, are very low, because value is the issue, not only “quality.”

So it is that most Comcast customers, able to buy gigabit internet access service or lower speeds for less money, likely choose to buy the midrange speeds at the midrange price.

“Nearly 55 percent of our residential customers take speeds of 100 megabits per second or higher,” said Michael Cavanagh, Comcast CFO. All that one statistic tells you is that 45 percent of consumers buy speeds less than 100 Mbps.

It does not yet tell you what percentage of customers will shift to gigabit services, from all other speed tiers. One would predict that relatively few will do so.

Consider the behavior of Comcast’s initial Xfinity Mobile customer base. You would say these are the early adopters, and that might lead you to believe these early customers are the “high performance” segment of the audience. That does not seem to be the case.

“Most of our (mobile) customers are taking ‘by the gig’ (plans) versus unlimited,” said Dave Watson, Comcast Cable CEO. In other words, the lead adopters seem to be “value” segments, not “bleeding edge” segments of Comcast’s customer base.

Rarely, in consumer telecom markets, do most customers buy the “best” or “basic” packages of any product. Most buy the “better” or midrange packages, instead. The likely explanation is that customers see the best balance of features and price (“value”) in such packages. And suppliers likely anticipate that reaction and build their retail packages accordingly.

The point is that gigabit internet access is going to be a key marketing position, even if it does not represent the bulk of sales for firms about to offer basic-better-best packages. What gigabit does is shift the dynamic range of the potential offers, creating new “super-premium” tiers and also redefining “basic” and “better” tiers.

But consumers will still buy based on value, and for most, the midrange will still fit best.

Innovation can be Democratized in Era of Artificial Intelligence and Big Data

5G Will be About Enterprise Use Cases

By 2025, the percent of enterprise traffic, now at perhaps 28 percent of total, could reach 96 percent of total, according to Bell Labs.

If you want to know why some of us believe the future for 5G is enterprise use cases, that is part of the reason.

On a separate level, Bell Labs also predicts that as much as 61 percent of all enterprise traffic will be terminated or originated using some wireless mechanism.

If 5G and some variation of Wi-Fi account for 61 percent of traffic, that leaves about 35 percent of total enterprise traffic that is neither 5G nor some form of Wi-Fi, but still wireless.

You might therefore guess that some of that traffic will be fixed wireless local access or some other form of wireless access, including specialized low-power, wide area networks of sensors.

By 2025, 69% of Enterprise Employees Might Use a Software-Defined VPN

Software-defined wide area networks (SD-WAN) are the current rage in enterprise networking circles, and probably for good reasons. According to Bell Labs, by about 2025, perhaps 69 percent of enterprise employees will be connecting by a software-defined virtual private network, which is what an SD-WAN provides.

Third Telecom Era Approaches

As revolutionary as was the change from telecom monopoly to competition, we appear to be on the cusp of a third era.

For a number of fundamental reasons, “telecommunications” roles are becoming more porous, diffuse and shared. The notion that “anybody can be an internet service provider,” in contrast to “there is only one lawful provider of service,” illustrates the point.

Depending on the use case, an enterprise (public hotspot) or even consumer (cable homespot, mobile tethering) can act as the ISP. For purposes of delivering e-books, Amazon acts as a special purpose ISP. Google and Facebook act as ISPs in a variety of settings and roles. Google Fiber competes directly with telcos and cable companies as a general purpose fixed internet services supplier.

In India, Google and Facebook partner to operate Wi-Fi hotspots in public locations and villages. There may be other roles and platforms in the future.  

Beyond that, as we move towards an era of pervasive computing. Value moves inexorably “up the stack,” to applications and use cases, and away from the simple value of internet access.

And that same process also means that traditional telecom apps (voice, messaging, content delivery) can be supplied by third parties, over the top of any specific internet connection. That further increases the potential amount of competition, and therefore will affect potential profit margins.

All that illustrates the point that industry revenue streams and business models are non-exclusive and open to challenge. Declining average revenue per account is one example of the trend. Declining profit margins are another direct result.

That, in turn, drives firm strategy. More scale helps with gross revenue and profit margins. That is why a major global wave of consolidation is likely--or virtually certain--over the next decade.

The U.S. market, for example, has not yet started to consolidate in the same way that India’s market already has started. In fact, it is likely the Indian mobile market will shrink in half, in terms of facilities-based suppliers, within a year, from eight to four.

It is only a straw man, but assume something similar happens in the U.S. market. That would potentially reduce the number of leading suppliers in half (across the fixed and mobile domains). Where there are perhaps nine leaders (across the fixed and mobile segments, including two cable operators, four mobile suppliers and three big fixed network suppliers), there could, over perhaps a decade, be just four left, with varying global roles, as well.

Any way you look at it Sprint, T-Mobile US, Dish Network are virtually certain to be involved in the next big merger wave in the U.S. telecommunications market. Charter Communications or Comcast are possibly going to be involved, as well as a few content firms.

While it remains possible that a Sprint tie-up with T-Mobile US could be proposed, it is not the only combination that makes sense, and many of those other mergers would likely have a better chance of regulatory approval.

That consolidation would mirror similar big market structure moves in India, which long has been among the mobile markets with the most facilities-based contenders.

So far, all we’ve seen in the U.S. market are talks and rumors. But the action is coming, for obvious strategic reasons. As profit gets wrung out of the business, more scale is the short-term answer, at the very least buying additional time and resources to work on the long-term objectives of changing the value proposition.

A reasonable and workable objective is to achieve a balance of “access” and “application” revenues that might approach 50-50. To be sure, nobody has done that yet. Eventually, it is likely to be necessary for survival.

Thursday, July 27, 2017

Underestimating Demand is as Bad as Excessive Optimism

The launch of AT&T’s DirecTV Now streaming service reminds me of its launch of the Apple iPhone. As you will recall, the iPhone launch appeared to have caught AT&T somewhat by surprise, in terms of the added usage of its data network.

Roughly the same thing seems to have happened with the DirecTV Now launch. In both cases, customers complained about quality issues that appear related to capacity to support the new services.

You can guess what comes next. AT&T took steps to fix the capacity problems related to iPhone customer behavior patterns, and likely has spent the last few months figuring out how to better support scaling of its DirecTV Now service as well.

You might well expect a renewed growth spurt, as a result. It’s just a reminder of how networks are dimensioned: you have to make assumptions about consumer behavior. Overprovision and you waste capital. Underprovision and consumers will have a troubled experience. It is hard to get it right, for new services that prove quite popular.

AT&T DirecTV Acquisition Seems to be Working

AT&T’s acquisition of DirecTV was not universally acclaimed when it happened. Some observers said AT&T needed to spend the money on better internet access. Others pointed out that the linear video business already was in decline.

Supporters argued that the move made AT&T a nationwide quadruple play supplier for the very first time. Others pointed out that the free cash flow almost singlehandedly would fund AT&T’s dividend for some time. Some added that the additional scale would improve economics for the firm’s video business now, while creating a much-stronger platform for OTT video to come.

So the new way to reassess that particular choice is whether you think AT&T or Verizon is in a better position, today, strategically.

If you believe all access providers will have to replace half of current revenues within 10 years, the only question is how to do so. In principle, you can make horizontal or vertical acquisitions, invest in new lines of business or grow organically.

Organic growth helps. How much that can help depends on whether a firm can take market share in a market or mostly has to defend its share, whether the markets are mature or young.

An attacking firm with low share always can grow by taking market share from incumbents. New entrants with different cost structures, attacking from “outside” an industry, with different assets, often have a much-easier time than incumbents attacking each other, with the same asset bases.

But most observers would argue that organic growth, in markets that are saturated, does not provide the scale of new revenue, fast enough.

And some critics might say AT&T faces issues with its DirecTV performance, in the form of subscriber losses in linear video. But the DirecTV Now OTT service, despite some issues, seems to have kept the video base at flat levels, in a business that is shrinking.

Average revenue per user is an issue, but AT&T seems to be reaping bundling rewards.

“Half of our DTV Now subscribers are coming from traditional pay-TV, mainly from our competitors, and the other half had no pay-TV service at all,” said John J. Stephens, AT&T CFO.

AT&T has “reached nearly 0.5 million subscribers,” keeping This has the video account base “essentially flat” from year ago levels, he said.

Importantly, the bundling of video and mobile services seems to be working. The number of wireless subscribers who also have a TV service from us has increased by more than 4 million, or up 31%, since the close of the DTV deal. Conversely, TV subscribers with wireless plans have increased by nearly 1 million, or 18%.

The number of mobile subscribers with DTV has increased by 72 percent, while the number of DTV subscribers with AT&T Wireless has increased by 1.7 million, or 52 percent.

The number of DTV subscribers in AT&T’s wireline footprint with IP broadband has grown by more than 2.7 million, to 67 percent of DIRECTV customers, said Stephens.

Wednesday, July 26, 2017

Go Horizontal or Vertical in Acquisition Strategy?

Access services are a mature market in developed countries, and eventually will become mature even in developing markets, even as new revenue sources are created to replace declining legacy services. That has business consequences.

Most large tier-one service providers (cable, telco, satellite) eventually grow more by acquisition than organic growth. That is not the pattern for smaller firms, but you get the point. In any “mature” market, where accounts are essentially saturated, any provider tends to get account growth mainly by taking an account away from another existing provider.

So supplier consolidation is a long-term process in the global telecom industry. The only question is how fast, and how intense, that process is at any moment in time.

But what sorts of acquisitions make sense? The easy answer has been to make “horizontal” acquisitions to gain scale in the existing business. In other words, acquire more access assets.

That is the thinking when analysts float trial balloons such as Comcast buying Verizon, or Verizon buying Comcast or Charter, or when smaller telcos do the same sort of thing.

At least in the near term, doing so is a faster, surer way to boost gross revenue, and boost profit margins, than investing in “long game” moves “up the stack.”

To be sure, in the near term, such horizontal acquisitions are likely to be the main trend in the global telecom industry (in terms of revenue accretion). Moving up the stack takes time, and might often contribute less incremental revenue than a simple horizontal acquisition.

But taking the “long game” route to moving up the stack is possible.

Consider Comcast, which is among the U.S. access providers with the best execution “moving up the stack.” In the first quarter of 2017, Comcast booked $20.5 billion in total revenue. The access part of the company booked $12,9 billion in revenue, while the NBCUniversal portion of the company generated $7.9 billion in revenue.

So the “up the stack” (content) part of the company represented about 39 percent of revenue, access about 61 percent of total revenue.

If any other major telco could claim it now earns 39 percent of revenue from “application layer” sources, it would be considered a major strategic success.

In the second quarter of 2017, AT&T earned virtually all its $39.8 billion in quarterly revenue from access services. That will change, assuming AT&T’s acquisition of Time Warner is approved.

In the first quarter of 2017, Time Warner booked $7.7 billion in revenue. In other words, after the acquisition, AT&T would earn just about as much as did Comcast in its most-recent quarter. That would boost content revenue at AT&T to about 16 percent of total.

It might not seem like much, but that would mean AT&T earns significant revenue, for the first time, from “up the stack” sources. AT&T of course will eventually want to do the same in enterprise and business areas related to internet of things, for example. But that will take time, both because the IoT market is nascent, and because the available acquisition targets therefore also are small.

Verizon has made a similar, if smaller move, by acquiring first AOL and then Yahoo, to create a new advertising business. In the first quarter of 2017, Verizon booked $29.8 billion in revenue. Revenue from its telematics unit was negligible as a percent of total, while, revenues from the  “Oath” unit were not disclosed. The point is that Verizon has not yet gotten to a point where “up the stack” revenues are significant.

But you see the point. Moving up the stack is hard, risky and often not able to move the revenue needle quickly. So the an emphasis on horizontal acquisitions is going to be hard to resist. But if you believe the access business is going to be fundamentally challenged, moves to gain scale in businesses “up the stack” is necessary.

The issue is, how to balance horizontal acquisition that boosts revenue and profit now, with investments in “up the stack” growth. Or, in an ideal scenario, can access providers move up the stack now, by acquiring assets that throw off enough significant current cash flow, to move the revenue needle immediately?

Comcast is the model for the U.S. market.

That illustrates an asymmetry for Comcast and Verizon, if you wantt to speculate on where value might lie, even if the odds of such an event are slim.

Comcast might value Verizon’s mobile assets, significantly growing the amount of its access revenues. But if you think a reliance on access revenues, going forward, is problematic, then Verizon gains more in any acquisition of Comcast, as it immediately gains “up the stack” assets, in addition to greater horizontal scale.

That is why some observers might argue that vertical acquisitions, where the synergy is clear, make more sense than horizontal acquisitions that increase scale in the access business.

Some will argue AT&T erred in buying Time Warner. Some of us would argue it is the right move, to move up the stack, when total revenue includes almost no “up the stack” contributions. If Verizon remains a buyer of assets, not a seller, “up the stack” makes more sense than a horizontal acquisition that simply adds more scale in access.

Some would focus on strategic angles, such as a faster path to “fiber deep” or “bandwidth deep” assets.

Others of us might argue that firms such as Verizon and AT&T, if they wish to remain leaders in the future (and not sell themselves), must create much more “up the stack” revenue. It is the only way to reposition their value in the ecosystem and escape a “dumb pipe,” low value, low margin existence.

Sales Friction Creates Barriers to Buying Behavior

Sales friction occurs when a sales process is: too long (the line at the grocery store) too complicated (working with real estate agents) a...