Wednesday, June 5, 2019

Fixed Wireless Might be the Only Way U.S. Telcos Compete with Cable

Despite much skepticism in many quarters, there is a simple reason why 5G fixed wireless will get serious attention by U.S. telcos. There is almost no other platform that viably could keep telcos within some distance of cable operator internet access offers.

The traditional answer has been to install fiber to the home networks, but the business model now is rather sharply llimited, and the risk of stranded assets explains the dilemma.

Clearly, cable TV dominates residential broadband. Cable has about 60 percent market share nationally and has been getting essentially all the net new additions for a decade.

The problem for any new telco FTTH supplier is that 60 percent of the potential customer locations (cable operator customers) will not generate any revenue. Immediately, the problem is building a business case when 60 percent of assets are stranded and producing zero revenue.

And though linear video is undergoing a transition to on-demand streaming formats, cable operators as an industry segment continue to have the greatest share of linear video accounts. So linear video helps the business case, in the near term, but is challenging over the next decade, as that business will dwindle.

Residential voice is declining for both telcos and cable companies and is not a driving revenue opportunity for either industry segment, and not a reason for building FTTH.

Ignoring for the moment business services and residential mobility, where cable operators also are taking market share, it is a reasonable statement that upgraded fiber to home networks pose a difficult challenge for telcos, as the business case is challenging, in terms of payback. In most markets, the revenue drivers for a residential fixed network are internet access and entertainment video.

And there are many instances where those two services, supplied by a telco, face grueling odds. If cable has 60 percent share of internet access, with networks able to supply 1 Gbps now, and having a glide path to 10 Gbps, then a telco building FTTH is playing catch-up, and no more. How many observers are confident that a telco can ever gain more than 44 percent share in the U.S. residential market, at scale? Perhaps not many.

The number of third parties entering the consumer fixed network business, mostly leading with internet access, slowly is growing. And that means the residential market becomes, in some areas, a three-provider market, further limiting potential telco gains.

Video helps the business case in urban and suburban markets, but always has been a money-loser in rural areas, and in any case is a mature and declining revenue source.

Some might argue that, in the 5G and succeeding eras of mobility, the primary value of a fixed network is backhaul. That might be an overstatement, but is directionally correct. Even cable operators expect wireless backhaul to be an important opportunity.

That is why a wave of asset dispositions, which have had fixed network operators selling fixed network assets, has happened. Most recently, CenturyLink has said it is open to selling the consumer business it operates.

The bottom line is that the market limits the potential for profitable telco investments in FTTH.

All of that sharply limits telco options in the next-generation network area. The business case for FTTH simply might not work, and yet abandoning the business also often is impossible (the assets cannot easily be sold).

All that explains the interest in 5G mobile and fixed wireless access. As mobile substitution for fixed service has cannibalized fixed voice, so the hope is that wireless internet access can become an effective substitute for fixed connections. For AT&T and Verizon, that is the business answer to next-generation fixed networks where the FTTH business case does not work.

For T-Mobile US, fixed wireless is a way to participate in the fixed networks businesses it could not enter as a mobile-only service provider. For cable operators, fixed wireless is an obvious way to enter adjacent markets without full fixed network overbuilds.

Other markets might have more-favorable upside from FTTH. But it is hard to avoid the conclusion that, in a great many portions of the U.S. consumer fixed networks business, cable operators have market share that telcos will be very hard pressed to attack.

Consumer internet access speeds must be boosted, to stay within reach of cable offers, and to maintain the value of their fixed networks. Doing so when FTTH does not offer a payback is the challenge 5G fixed wireless is meant to solve.  

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