5G Demand is Real....for Suppliers

“I don’t feel the difference,” says one South Korean user of 5G services. That is not to say there are no use cases for consumer 5G. Another user “notices a difference on the superfast network only when downloading files or images on his phone,” according to a Wall Street Journal report. 

But that already seems to be one huge difference between 4G and 5G user experience: 4G provided a noticeable improvement in experience, compared to 3G. Whether the use cases was simple web surfing or entertainment video, 4G was experientially better than 3G. 

People used to switch to public Wi-Fi, when possible, because Wi-Fi provided a better experience than 3G. In many cases, that now is reversed, and the mobile network provides a better experience. Most users still rely on Wi-Fi when indoors, sometimes to reduce mobile data consumption, sometimes for performance reasons, sometimes for reasons of coverage (the Wi-Fi signal is stronger than the mobile signal). 

Though 5G will generally be faster than 4G, the experiential benefits may not--with the exception of downloading--actually be detectable. That poses a different adoption challenge than did 4G. Where 4G offered a difference users could see, that will not generally be the case for 5G, simply because the applications people use will not benefit from the higher 5G speeds. 

So adoption might well be driven by other sources of value, including new devices people want that happen to use 5G; service plan inducements mobile providers will introduce (higher or unlimited usage, for example); prestige in some cases. 

On the supplier side, 5G will immediately provide a way to supply additional bandwidth in urban areas where consumers complain about congestion and slow speeds. In other words, 5G is supplier push rather than consumer pull in a direct sense, allowing mobile operators to meet surging data demand and quality of experience expectations, more than any obvious new use cases. 

source: Ericsson

Netflix recommends minimum internet access speed of 25 Mbps per stream for viewing 4K video, 5 Mbps for high-definition video. But it also is questionable whether 4K viewed on a smartphone offers resolution a user can actually detect. In other words, 4K is probably not detectable by the human eye. 

Virtual reality is the use case where 5G might really matter, but few such use cases are yet common on smartphones. 

You might ask “what is the point?” Eventually, 5G will prove its value, if for no other reason than allowing service providers to supply the bandwidth customers want at prices they are willing to pay. 

source: Ericsson

Eventually, other developments, ranging from edge computing to virtual and augmented reality, plus internet of things, eventually will make 5G more compelling, creating use cases and revenue models for device, app and service providers. 

Still, for the moment, consumer value will be limited to downloading speed.

Ireland Market: Revenue Down, Broadband and Mobile Subscriptions Up

Just in case you needed one more data point, in Ireland communication costs have dropped, while the consumer price index has climbed, since 2017. Meanwhile, total revenue has dropped, fixed line revenue has dropped more, while mobile revenue has climbed. 

source: ComReg

Ireland’s story will be familiar to many of you: use of voice has declined, while broadband subscriptions are up, fixed voice subscriptions down while mobile subscriptions have increased. 

source: ComReg

4G and 5G Comparisons are Not Always "Apples to Apples"

There are always some test results one cannot readily explain. And that often happens when testers do not have the ability to create full "apples to apples" comparisons. Consider comparisons of 4G and 5G speeds.

5G is supposed to be faster than 4G. Higher-frequency channels should deliver faster speeds than lower-frequency channels. 

Also, in principle, spectral efficiency should be higher when channels are wider or larger, at least in part because less bandwidth is “wasted” on guard bands. Larger channels, with fewer guard bands, should produce higher efficiency.

That might be the case for a test of 2.6-GHz 5G spectrum on Sprint’s network in Chicago, which found 2.6-GHz spectral efficiency greater than on millimeter wave spectrum. 

“Based on RB-normalized throughput and MCS allocations, the Band 41 spectral efficiency was at least 50% higher than 5G millimeter wave for most test scenarios in Chicago when compared with testing did in New York City late this summer,” according to a study of Sprint’s network.

source: T-Mobile US

But there are notable elements of the test that likely account for the finding that 2.6-GHz efficiency was higher than that of millimeter wave networks. The Chicago test used some form of carrier aggregation, where both the 2.6-GHz 5G channels and also 4G LTE bandwidth could be used by the phones tested. 

In principle, that means the effective 5G bandwidth theoretically could use 120 MHz of spectrum across the 4G and 5G networks. It seems likely that the millimeter tests used channels of less than 120 MHz, since 5G channels can range from 5 MHz up to 100 MHz, 

Of course, radio technology also matters, as is the case with different flavors of MIMO (multiple-input, multiple output) radios. It also seems very likely that the Chicago tests used commercially-available phones, while the millimeter wave tests used modems, not phones. Those test elements might have affected results. 

But the key explanation most likely includes channel width as the explanation.

Service Provider Strategy Hinges on Managing Product Life Cycles

Tier-one connectivity provider business strategy hinges on product life cycles, and the effort to create replacement products as legacy products are harvested. Key examples include the harvesting of fixed network voice and promotion of mobility as a substitute product; the waning of long distance calling revenues and its replacement by a combination of mobility and messaging revenues; the harvesting of voice in general and its replacement by internet access. 

Entry into linear video services is a growth strategy for some service providers, while others are harvesting linear services while building over the top replacements. 

source: Consult

Investment is required before a product is launched. In the telecom industry, this includes standards work, product development by infrastructure suppliers, some amount of lobbying work with government or regulatory entities and then marketing and capital investment. 

There is a predictable corollary to these initiatives. Work on the next generation of products has to be underway before the legacy revenue driver is exhausted. 

source: Plexius Group

In the early days, as with most big new product launches, building brand awareness and gaining market share are key, while profit margins often are less important. Once a product is mature, though, strategy shifts to defending market share and increasing profit margins. 

source: Parcus Group

In product decline phase, revenue has to be harvested, assets divested or operations halted. 

One big question might be “what comes after mobility?” Another question could be “what comes after internet access?” Other questions could be asked about what comes after entertainment video. Not all service providers, in all markets, will have to create answers for these questions immediately. 

But some must grapple with the issues now. In some markets, voice, internet access, messaging, linear video entertainment and even core business customer services are either mature, or facing product substitution, or both. 

Globally, telecom service provider revenue growth rates are about one percent, STL Partners estimates. 

Mobile voice revenue, for example, might fall from $380 billion in 2019 to $210 billion in 2024, at least in part because of  increasing usage of over-the-top apps, including WhatsApp and Viber, says Juniper Research. 

The big point is that connectivity providers must continue to search for new revenue drivers beyond voice, mobility, internet access and entertainment video.

Ridesharing and Mobility Have been Disruptive Attacks on Markets

Ridesharing represents what many consider disruptive competition, and there is some evidence for that outcome. Welcome to the world telecom providers and internet service providers live in. 

At Los Angeles International Airport,  shared van rides plunged by 66 percent in the first half of 2019 compared with the first half of 2016, the first full year that Uber and Lyft operated there, according to city data. 

Trips on FlyAway buses also sank by 66 percent over the same period, while taxi trips fell 39 percent. Use of courtesy shuttles to car rental facilities, parking lots and hotels saw a 20 percent decline. The number of Uber and Lyft trips more than doubled in the same time period. 

Many would agree that mobile phone service has been disruptive for fixed network voice services, even more so than VoiP or messaging. mobile surpassed fixed subscriptions globally in 2002, the International Telecommunications Union says. 

In the U.S. market, for example, consumer spending on fixed network voice dropped from about 45 percent of “telephone” spending in 2007 to less than 20 percent by 2017. Mobility spending conversely grew from about 55 percent in 2007 to more than 80 percent by 2017. 

U.S. Bureau of Labor Statistics

Some estimate average spending by U.S. families of about $40 to $60 per user, per month, an amount that almost does not register as a percentage of total household spending. In Europe, communications spending altogether is about 2.4 percent of household spending. U.S. households might spend two percent of total on communications. 

In fact, communications spending represents a small enough category that the U.S. Bureau of Labor Statistics does not track it.  

In Canada, in just one year between 2015 and 2016, fixed line voice spending fell nine percent, while mobile spending was up six percent, for example. 

source: Canadian Radio-television and Telecommunications Commission

Will Total Video Subscription Revenue Grow as Linear Shrinks?

Some of us cannot recall a time in the last 30 years when U.S. consumer spending on video entertainment did not grow. That still appears to be the case. 

Home entertainment revenue is expected to show a compound annual growth rate of 9.2 percent from 2019 to 2024, according to Statista. 

Of course, home entertainment is a bigger category than video subscriptions. With the growth of over the top video streaming and the decline of linear video subscriptions, some might question whether that trend of ever-higher consumer spending on video content products can be sustained. 

Over the past few years, U.S. home entertainment revenue growth has slowed from about 15 percent in 2018 to perhaps 12 percent in 2019, and could dip to perhaps seven percent in 2024, according to Statista. That still represents robust growth for most products in the connectivity business, however.  

Video on demand continues to grow, however. 

In 2019, U.S. over the top video subscription revenue was about $16.4 billion, according to PwC. 

Subscription TV revenue of US$94.6 billion in 2018 will contract at a -2.9 percent CAGR to US$81.8 billion by 2023. Adding back revenue from expected OTT video suggests the overall video subscription business continues to grow, though the recipients of that revenue will change. 

source: PwC

S&P Global Market Intelligence

What Roles for Telcos in IoT?

Just about every participant in the mobile ecosystem (from chips to operating systems to hardware, apps and networking services) has to think about the potential upside from massive internet of things adoption. 

Device and app suppliers arguably have an easier time conceiving of new value they could provider. 

Smartphones normally contain some common sensors, including accelerometers, gyroscopes, magnetometers, GPS, ambient light sensors, proximity sensors and other potential sensors that might eventually enable IoT applications. Other capabilities of phones, such as use of their radios, can help establish traffic conditions, using the phones as proxies for vehicles. 

But there are some valuable bits of information smartphones will not be directly able to sense, such as road conditions. So Pirelli envisions smart tires, which are capable of sensing and communicating road information to apps and other drivers. 

source: Pirelli

Opportunities for connectivity providers are harder to see, beyond supplying the mobile or fixed connections. Some believe that tier-one telcos could handle the life cycle management of IoT sensors. Hardest of all, but more lucrative, connectivity providers might create IoT apps themselves in a few areas, most likely around transport, cars and other vehicles, which require untethered communications. 

There are obvious issues to be overcome. Life cycle management will include replacing sensors and batteries. That might be conceivable for portable sensors, but there also are other obvious channels (electronics retailers, large retailers). Replacing embedded sensors does not seem to be an area where big telcos or internet service providers necessarily have a natural advantage. 

That might be something better suited in many industry verticals to the service operations already in place to support industry-specific equipment. In other words, if a consumer has a heating or cooling system sensor problem, is a telco the logical company to come fix the problem? How about sensor issues on an industrial robot, or a sensor on a vehicle? 

source: IBM

Many believed telcos could be viable suppliers of some types of computing infrastructure as well, and that rarely has worked as well as hoped. Still, the general thinking is that IoT presents a range of potential roles for access providers, beginning with the connectivity function. 

Moving towards platform opportunities, perhaps access providers create application program interface capabilities allowing third parties to add communications to their services and apps, though, as always, specialists seem already to have established themselves in this role. 

To greater or lesser degrees, some access providers might develop vertical industry capabilities or perhaps domain-specific solutions. Perhaps one logical avenue is IoT for internal use for asset management and security. 

In fact, the telecom industry is among the top-four industries for use of sensors and monitoring systems, Tata Consultancy Services found. 

source: TCS

As a rule, we should expect all access providers to build first on the connectivity function. Only a relative few will attempt other roles as platforms or solution providers.

How Much Does Internet Access Actually Cost?

In a non-scientific study of consumer fixed network internet access bills, the Wall Street Journal found monthly bills for service at about 100 Mbps clustered between $45 a month to $70 a month. The caveat is that the sample is heavily weighted to just one internet service provider, Charter Communications, which has a heavy subscriber weighting to rural areas, in addition to some big-city systems. 

Notably light in the survey were customers of Comcast’s services. Comcast is the biggest U.S. supplier of fixed network internet access connections. 

source: Wall Street Journal

I would not infer too much except where it comes to Charter customer experiences, where the typical price paid for internet access tends to run in the $45 to $80 a month range. 

depends on whether service is purchased a la carte or as part of a bundle. A la carte prices virtually always are higher than bundled prices. It is possible that 60 percent to 75 percent of U.S. households buy a bundled fixed network service. 

The Journal collected and analyzed information from more than 3,300 bills from homes in all 50 states, mostly supplied by Billshark, a company that helps customers negotiate better rates with their cable and telecommunications providers. 

Among the unknowns is how customers on triple-play packages, or bill analyzers, decide to allocate a bundle’s cost across video, internet access and voice components of the bundle, as triple-play service details are not typically shown on a bill. 

That means any evaluator has to make assumptions about what the “price” of each component might be. One method might be to take the posted a la carte rates for each individual service and then discount by an equal amount. Others might try and weight the prices based on some assessment of value. 

Any method involves making assumptions that cannot be independently verified. Some of us would apply a near-zero (there are taxes and fees, even if the value of the service is deemed to be “nothing”) or actual zero value to voice, and then allocate total bundle price only to the internet access and video services. In principle, that could boost internet access and video prices inside a bundle by $20 to $25 per service. 

source: Global Data 

The other obvious issue is whether the analyzed or assumed prices include only the actual service, or whether equipment rentals, fees and taxes are included. Obviously, ISPs want to advertise only the lower figure; customers are likely to use the “what I pay” total, which always is higher. 

“In some cases, the final cost (of a bundle) is as much as 45 percent over the advertised rate,” said Courtney Rudd, GlobalData analyst. “For example, Xfinity’s $40 ‘Starter Internet plus Basic’ TV bundle jumps to $58 per month once the additional $18 in equipment costs are added. Prices can also vary based on location.”

As has been the case in the broader telecom industry, actual prices and profit margins are, in large part, determined by the allocation of costs and overhead to various services. 

Video entertainment arguably has the highest cost of goods, so I would allocate perhaps 46 percent of price in a bundle to video. Then perhaps 32 percent of price in the bundle to internet access and maybe 21 percent for voice (as accountants might tally the numbers).

Consumers buying triple play bundles might allocate near-zero value to voice, however, even if offering voice has non-zero cost to connectivity providers. That obviously would affect the perceived price of internet access and video services. So one way to tally the price is to say that even if the value of voice in a bundle is zero, it has a cost, namely the attributed fees and taxes a consumer has to pay, even when not using the voice line. 

I’d estimate that cost as about three percent to five percent of the bundle price. So maybe 54 percent of the bundle price is for video, 40 percent for internet access, five percent for voice. 

So that might imply a retail price of video in a triple-play bundle as about $82 a month, internet access at about $61 a month, voice at perhaps $5.

After Merger with Sprint, T-Mobile US Might Want Merger with Comcast

At least some of us have long believed the “best” set of merger outcomes would be for Sprint and T-Mobile US to be merged with (pick one combination) Comcast and Charter Communications, allowing four suppliers to sustain themselves in a market where “mobile only” seems unsustainable in the consumer market. 

Now there are indications that is what T-Mobile US might be thinking, assuming its merger with Sprint is approved. 

The long-term sustainability argument has been that integrated service providers serving the U.S. consumer market would have to own both fixed and mobile network assets. 

The proposed T-Mobile US merger with Sprint, creating a big mobile-only company. That has therefore seemed the first of at least two mergers. Create a big mobile-only entity, then merge again with Comcast or Charter, Charter the more-likely candidate. 

The long-term sustainable structure for the U.S. consumer connectivity business has seemed to be four firms, including assets clustered around AT&T, Verizon, Comcast and Charter Communications, each with both mobile and fixed network facilities ownership. 

For that matter, the long-term and sustainable market might have all four of the leading contenders involved in some way with content assets, though Comcast and AT&T are likely to continue to be the only two with significant content production assets and revenues. 

Such cable-mobile combinations have a rather lengthy history, with Cox Communications and Cablevision Systems Corp. having tried a go-it-alone regional approach, with several of the biggest U.S. cable firms having partnered with Sprint decades ago for spectrum purchases and other possible uses of that spectrum. 

Cablevision Systems, in fact, was considering a non-mobile wireless service about 20 years ago, essentially modeled on Japan’s Handy-phone Handyphone wireless service, supporting voice communications at pedestrian speeds, but not full mobility at high speed. 

Cablevision’s thinking was that its hybrid fiber coax network would allow it to build such a system without the cost of acquiring licensed spectrum and building a full mobile network. That same sort of approach is used by Comcast to support its voice on Wi-Fi network using hotspots with public as well as private access. 

Such strategic scenarios also illustrate why the entry of Dish Network into the mobile market also is the first of at least two transactions. Dish has to replace its declining satellite video business with another big key driver, which it hopes will be mobility. 

But that only creates yet another mobile-only company, and that is unsustainable in the U.S. market, some would argue. So the eventual path will be a combination of Dish assets with another entity, especially if, eventually, every leading internet service provider owns its own mobile and fixed networks, save one. 

If the Sprint merger with T-Mobile US is approved, we might well see that as only the first of two big transactions. The second will merge the mobile-only assets of new T-Mobile with the fixed assets of a cable company.