U.S. Consumers View "Choice" in New Ways

Ever since the advent of satellite-delivered programming, choice has been the core value linear video subscriptions have offered. But value now has become an equally-big issue.

Some 90 percent of U.S. residents polled by Morning Consult say that the most important factor when deciding to subscribe to a TV or streaming service is cost.

Some 56 percent say cable TV is "unaffordable" and 47 percent say the same about satellite, while just 17 percent deem streaming unaffordable.

But the real issue is value. Those same respondents also say they object to paying for channels they do not watch, and prefer to buy only channels they actually watch. On the other hand, consumers also say they value services with quantity and quality of shows.

source: Morning Consult

So “choice” has a new meaning. Choice once meant having scores to hundreds of programming choices, not three broadcast TV stations. Increasingly, choice now means “paying only for what I choose to watch.”

Where the traditional maxim has been “I want what I want, when I want it,” the new mantra might be “I want only what I want, when I want it.”

source: Morning Consult

source: Morning Consult

Main Trend in Video Always is "More Choice"

Even if the initial impetus for the cable TV business was signal access (bringing metro market TV signals to distant areas unable to receive the signals off air), the more-recent growth since the advent of satellite-delivered programming in the mid-1970s is “greater programming choice.”

“Choice,” in those days, meant “access to more channels and genres.” These days, “choice” means “ability to buy only the channels I want.” The former trend drove adoption of linear subscription video. That latter drives over the top subscription video.

source: Brightcove

Whether you look at linear video or any form of over-the-top streaming, the value proposition always is about "more choice."

Value is the other big issue, now. Potential customers want greater value, which tends to mean lower prices per subscription.

How Much Share Will Fixed 5G Gain?

To mobile substitution we now have to look to fixed wireless substitution for networks built using cabling of some sort (hybrid fiber coax, fiber to home, fiber to cabinet, all copper).

As always, opinions vary about the potential amount of substitution, in urban or rural markets, with the greatest skepticism about impact on rural markets. In many cases, that is because of signal propagation characteristics of millimeter wave spectrum in such bands as 28 GHz and 39 GHz.

It is reasonable to suggest that many believe lower-frequency signals in the 3.5-GHz band might be more important in rural areas, as 3-GHz and 5-GHz frequencies already are used by fixed wireless providers in rural areas.

Analysts at CoBank are in the camp that believes millimeter wave spectrum will not have very much impact on rural internet access, and also believes fixed wireless using millimter spectrum will be less successful than Verizon estimates.

Still,  others might note that, in urban and suburban areas, even using skeptical estimates, Verizon alone might be able to take significant market share from other internet service providers using cabled approaches.

In the first five years or so, such gains might only represent share gains between 11 percent to 18 percent, in the areas where Verizon builds fixed wireless networks. In substantial part, such skepticism is founded on transmission distances that might range from 500 foot  to 1,000 foot cell radii.

To be sure, skepticism on the part of many observers, such as rural telcos who rely on cabled approaches, is to be expected. After all, fixed wireless is yet another alternative to existing telco or cable TV networks.

CoBank analysts believe the general absence of cable TV operators from the ranks of bidders for new millimeter spectrum indicate those firms are not worried about millimeter wave spectrum approaches. If they were threatened, CoBank analysts argue, cable operators would be bidding for spectrum, either to deny the use of such spectrum to would-be competitors, or to use the platform themselves.

Some of us would disagree with that logic. For institutional reasons, cable executives have disliked running services over any platforms they do not own, with a strong preference for HFC whenever possible. Already looking at use of leased facilities to support their early mobile efforts, cable executives might resist adding more one platform, especially if they conclude the revenue upside is limited.

Cable operators also seem to favor lower-frequency bands, such as 3.5 GHz, in part for reasons of cost, in part for reasons of signal propagation.

Nor would cable operators be able to simply “warehouse” spectrum very effectively, on a long term basis. “Use it or lose it” is the standard policy for new spectrum awards. And even if cable operators wanted to warehouse 28 GHz or 39 GHz spectrum, lots of other spectrum in the millimeter bands will be released for commercial use, and much of that spectrum will be available on an unlicensed basis (or licensed on a no-fee basis).

source: CoBank

The other issue is the extent to which 5G mobile networks might emerge as similar substitutes for cabled network access.

In 2015, about 20 percent of U.S. households used mobile as the exclusive method for accessing the internet, according to the National Telecommunications and Information Administration.

source: NTIA

As you would likely guess, lower-income households tend to do so at greater rates than higher-income households. But even in the highest-income households, 15 percent use mobile as the exclusive form of internet access.

source: NTIA  

Small Cells and Millimeter Wave Spectrum are Key to 5G Cost

Though it is likely 5G infrastructure costs will rise for some service providers, costs might rise very slightly for many, and could be lower for some. Some fear capital investment could be double to triple the levels of 4G. By other estimates, 5G will require just four percent higher capital investment than did 4G.

But cost parameters are changing so much that some expect 5G capital investment might actually be less than 4G, even if the historic trend is that each next generation mobile platform requires incrementally more investment.

Korea Telecom says that, in its 5G deployment to support the recent Olympic games, the use of 28-GHz spectrum required small cells. But KT says that, compared to 4G, that meant four times the number of cells.

That sounds like a huge increase. In fact, it represents a shrinking of cell coverage radius only about 50 percent. And is well within historical changes in the mobile infrastructure business.

Since the earliest days of the mobile business, cell sizes have shrunk by perhaps three orders of magnitude.

source: ZTE

Through about 1995, for example, most of the increase in U.S. mobile capacity was driven by smaller cell architectures, not new spectrum. Since about 1996, new spectrum has played a bigger role in boosting mobile capacity. Still, the bigger share of capacity increases has been driven by use of smaller cells.

source: Science Direct

And some believe that even as new spectrum is added at high levels, the use of smaller cells might increase just as fast, even to support 3G and 4G networks, to say nothing of 5G networks.

source: Frank Rayal

The point is that it is hard to extrapolate clearly between infrastructure cost and the number of cell sites. But macrocells, which can cost $500,000 to $1 million each, are being reinforced with small cells that might cost as little as $1,000.

So even if most believe 5G investment will be higher because the reliance on small cells, to support millimeter wave frequencies, will drastically increase the number of new cell sites.

Also, all those cells will require backhaul, so estimates for spending on 5G backhaul likewise are higher than for 4G.

Others might not agree. Indeed, some argue 5G costs might well be lower than 4G, or might come at a slight premium. There are many reasons.

Small cells might only be needed in dense urban cores. Open source network elements, virtualization, better radios, use of unlicensed and shared spectrum or shared infrastructure will change the cost curve.

And small cells cost an order of magnitude less than macrocells. They might eventually, in volume, cost two orders of magnitude less.

The point is that the cost to build 5G networks might vary quite a lot.

Consumers Can't Tell You, Today, Whether They Want 5G

Steve Jobs, Apple co-founder, had some famous opinions about market research. One reason Jobs was skeptical about much market research is that it is impossible for a consumer to evaluate something that person has never seen, a reasonable enough assumption.

“People don’t know what they want until you show it to them,” he once said. “Our task is to read things that are not yet on the page.”

There is something of that happening when we take surveys of what people know and want from 5G, something they never have experienced, even if 5G arguably is similar in some ways to prior generations of mobile service.

A recent PwC survey, for example, found 46 percent of respondents were familiar with the term 5G, without prompting. So a majority of respondents presumably have no way of knowing what 5G is, or what it might mean.

The point is that some skepticism is warranted. People cannot make actual buying decisions about products they have not yet seen, touched, tasted, smelled or heard.

And, as often happens, respondents might be inconsistent about what they want most, and what they most are willing to pay to get.

Although respondents suggested reliability was the “most important” attribute, “faster speed” was the single change the greatest percentage of respondents indicated they would pay a higher fee to get.

source: PwC

Assuming that 5G delivers on its promise of faster speeds, around a third of customers indicated that they’d be willing to pay $5.06 more per month on average, versus $4.40 more per month for mobile customers, PwC says.

More would pay a premium for 5G if it provided “better quality video” on their mobile device. Some 29 percent of respondents suggested they would pay more for better video, compared to 25 percent of respondents similarly willing to pay more for better video on their fixed service.

The key caveat here is that most people do not know what the term 5G means. They have never had a concrete experience with 5G. They may not know they have to buy new devices. They have not been presented with a concrete offer. Nor have they been able to evalue better 4G services against new 5G offers.

Moreover, it is possible that the real value of 5G for new use cases will emerge most clearly on the enterprise side of the market, to support internet of things use cases, not consumer broadband. We soon will begin to test actual demand in the real world, and surprises could emerge.

People simply cannot make fully rational choices about products they have no experience with, with no actual pricing information, terms and conditions of use. Steve Jobs’ advice likely is warranted in that regard. People cannot tell you whether they want a product they have never seen.

Some Customers Need More Fiber, Some None

Sometimes the truth emerges even when not intended; at times even when the opposite argument is being made. Consider the argument for gradual introduction of more optical fiber into hybrid fiber coax networks, which is sound thinking.

Though making that case, one optical supplier executive has said that “connectivity is increasingly transforming from static wireline to mobile or wireless delivery,” said Cate McNaught, Corning Optical Communications emerging applications market development manager.

That is not to say fixed network access is going away, or will not underpin wireless or mobile network backhaul (fronthaul, anyhaul). It is to acknowledge that content and video consumption on mobile and untethered devices seems to be the main trend right now, with mobile over the top video services proliferating, and more content supplied by all OTT services being consumed on mobile devices.

The issue then is not the need for more optical fiber in access networks, but the business models and rationale for doing so. The problem is stranded assets Today, fiber to the home networks in the U.S. market strands as much as 60 percent of the deployed FTTH capital. That creates a bigger return on investment problem.  

Consumer spending on communications and entertainment services has not changed all that much, in most countries, although the specific products purchased have changed.  

At the same time, the profit margin from many services also has compressed. Prices per gigabyte for consumers using internet access services have declined by about an order of magnitude since 2012, in the U.K. market, for example.

source: Department for Digital, Culture, Media & Sport

The stranded assets problem simply is that when a ubiquitous network is built, not every single home or business buys every service. Not every consumer buys fixed network voice, entertainment video or internet access. Not every business buys the same mix of voice and data services, or mobility.

The problem really is compounded, however, as multiple suppliers compete. If the demand for any single product is 95 percent, and there are three competent suppliers, on average, any supplier can only expect to get revenue from 32 percent of locations passed by the network.

In other words, 68 percent of locations passed earn no revenue.

Such problems can intensify when the demand curve changes, as when consumers abandon use of fixed network voice in favor of mobile voice. The remedy, up to this point, has been product bundles.

One set of numbers from the Comcast third quarter 2017 results is instructive: Comcast details the number of customers taking single, dual-product and three-product or four-product packages.

About 30 percent of consumer customers buy just one product, a third buy two products, while 37 percent buy three or four products as a bundle. Looking at each buy as a “unit sold,” those figures help service providers deal with stranded assets.

If 37 percent of Comcast customers buy an average 3.5 products, that equates to an average of 1.3 products per home passed. If 33 percent buy two products, that equates to one unit sold across 66 percent of the homes passed. The 30 percent of homes that buy only a single product, when added to the dual-product homes, equate to one product sold to 96 percent of homes passed. Altogether, those figures mean Comcast sells an average of two products per home passed.

And that is how the economics work, even when stranded assets range from 40 percent to 60 percent.

The business model will come under more stress if and when mobile alternatives emerge more strongly. So two apparently contradictory claims can be made: there will be a growing need for more access optical fiber, and there also will be less need for some of it.

The remaining customers will need optical fiber advantages more; but fewer customers will buy.  

Is Network Slicing the Key to Mobile Speed Tiers?

Speed tiers are commonplace on fixed internet access networks, while they have been impossible on mobile networks. But that could change.

Virtually nobody seems ever to have suggested that network neutrality outlaws speed tiers, where different service plans are available on fixed networks, featuring differing speeds (25 Mbps, 100 Mbps, 300 Mbps and 1 Gbps, for example).

That might seem odd, since much of the language around network neutrality has been opposition to the creation of fast lanes on the internet. In principle, we might agree that the specific objection is to blocking or slowing lawful apps, not fast lanes as such.

Network neutrality often is said to allow internet service providers to “block” lawful content or charge additional fees to content providers when quality of service mechanisms are applied to service tiers.

Were the real objection fast lanes, then net neutrality supporters would have objected to differential speed tiers, where consumers can choose to buy slower or faster tiers of service. They did not. So the issue really is blocking or otherwise “slowing” some lawful apps.

It is even more complicated than that, though. As a practical matter, what net neutrality supporters tend to object to is any ISP ability to create business arrangements with content or app providers that ensure better quality of end user experience by reducing latency.

As many have pointed out, that is precisely what happens every day, when content delivery networks are used. CDNs cache content at the edge of the network to reduce latency and improve experience.

That necessarily is “unfair,” since app and content providers pay money to use a CDN.

So consider 5G networks that assume the use of a core network that inherently can create many virtual private networks, all the way to the radio edge, that have different performance characteristics.

This already is envisioned as a way of supporting enterprise networks with distinct use cases. Might the same approach be taken to support several speed tiers of mobile access?

source: sdx central

In principle, such a network can create “network slices” or virtual private networks that might include a “bronze, silver, gold” approach to access speed, something that has not been possible on mobile networks, up to this point.

At least in principle, three VPNs (network slices) could be created to support access by customers on bronze, silver or gold plans, with two of the plans featuring higher speeds than the standard level of service.

A routine retail offer on fixed networks, that form of service differentiation has never been practical on mobile networks. That could change.

What is the Killer App for 5G?

Early on in the 3G era, video calling was a hoped-for new “killer app.” That did not happen. But it has become commonplace on 4G networks. In a similar way, content services were expected to flourish in the 3G era. That did not happen until 4G.

Augmented reality apps were supposed to develop on 3G networks. That still has not happened.

In fact, many would find it hard to point to a killer app  for 3G. Eventually, new apps do emerge. And some might say the early value of 4G was just speed.  

You might argue text messaging was the new killer use case for 2G. You might suggest mobile email and Internet access was the legacy of 3G. Video entertainment is developing as the singular new app that defines 4G.

Internet of things is expected to drive the futuristic new use cases for 5G. Many believe 5G fixed wireless, though, will represent the early new use cases, beyond bolstering consumer internet access speeds and augmenting 4G capacity in geographic areas where congestion is an issue on busy cell sites.  

Still, it is fair to say we are likely to be surprised by what 5G brings, or fails to bring, as has been the case for the other next G mobile networks.

Among the possible surprises could well be that hoped-for new use cases do not flourish in the 5G era, but take longer to reach near-ubiquity. That is why some believe 5G will wind up being more like 3G--a platform whose innovation lagged expectations--than 4G, a network platform that some would argue largely developed on the promise of new apps enabled by greater capacity.

As was the case for 4G, which provided significantly faster speeds, making video consumption feasible, 5G will boost access speeds, by an even greater margin. But the bigger long-term change is the shift to ultra-low latency.

It would be a reasonable supposition that use cases for higher speed will develop sooner, with greater scale, than use cases for ultra-low latency. And that is why some believe 5G might be more like 3G than 4G.

The wild card is the role of enterprise apps and use cases. Some of us argue that what makes 5G clearly different from all prior mobile generations is that brand-new use cases are more likely to emerge in the enterprise segment of the market.

In the case of prior generations, growth and use cases were lead by consumer applications. That is unlikely to be the case for 5G, if internet of things actually emerges as the killer set of apps.

Will 5G New Use Cases Flourish Only in 6G Era?

If past patterns hold, 5G will reach its peak of adoption in a bit more than a decade, while having a useful life as long as 20 years. So we will know, within a decade, how well 5G lives up to its promise as a platform for new use cases related to internet of things, and how well new ultra-low-latency applications have developed.

There is precedent for something else as well. Many innovations hoped for in the 3G era arguably flourished only in the 4G era. So it is conceivable that although 5G will see the early years for many new use cases, those applications will thrive only in the 6G era.

source: Chetan Sharma

Despite clear evidence that mobile operators in the United States, Japan, South Korea and China are charging fast into 5G, with firms in each of those countries believing 5G leadership will lead to broader benefits, many operators in other nations are less optimistic about the near term business case.

In some cases, that skepticism or agnosticism also has other roots: recent and major investments in 4G, uncertain spectrum allocations or the general state of the mobile business (very low growth) in general, which raises the risk of big new investments in 5G.

Add to that divergence the sense in early-adopter countries that 5G is about industrial policy, while perhaps not a plausible possibility in most countries, and the split of opinion is easy to explain.

Optimists might point out that business model fuzziness also was a characteristic of both 3G and 4G, so some amount of uncertainty is perhaps typical of next-generation mobile platforms in recent eras that have seen revenue growth drivers migrate from voice to messaging to internet access for revenue growth, and which now will have to depend on additional new growth drivers in the 5G era beyond internet access for people on smartphones.

It also is fair to say that early adopters in 5G vary by continent, with mobile operators in the United States, Japan, China, South Korea moving early and aggressively into 5G, while European, African, South American and broader Asian operators are more circumspect.

In some instances, the hesitation is related to the recency of 4G investments. In other cases the difficulty of the mobile business model in general makes a major upgrade cycle unpalatable.

There are divides, by continent, on the matter of internet of things upside as well, possibly because many observers see the biggest early revenue cases developing in North America and parts of Asia.

source: Research Nester

So it might not be surprising that mobile operators in the United States and East Asia are more optimistic about the near term 5G and IoT business cases (as IoT upside will be dependent on 5G, in important cases).

In Europe, the IoT opportunity often is included in discussions of the “fourth industrial revolution.”

One hears the term of art used less in the North American markets, perhaps suggesting different perceptions of where opportunity lies. In a broad sense, users of the term fourth industrial revolution seem to use it in a sense similar to “digitalization” and a bit more reliant on applying artificial intelligence to business processes.

Other touted revenue platforms such as edge computing are simply early in development, as edge computing requires new lead apps such as autonomous vehicles to drive such requirements.

Some observers also note the nebulous discussions and status of artificial intelligence within the service provider community at the moment, though, perhaps surprisingly, AI is seen by some as having more relevance for mobile operators than 5G, IoT or edge computing.

The point is that near-term optimism about 5G, internet of things and edge computing--if not complete conviction at the same level--is higher in a few markets than across most of the globe.

In part, that is because 5G business cases are part of the broader IoT and edge computing trends. Without significant IoT growth, it is hard to make the case either for 5G or edge computing.

At the moment, 5G and IoT are a Rorschach test. Different people see different things.