Will 5G Prove to be Another Example of Innovation Despite our Efforts?

Sometimes big changes in communications demand happen almost despite our best efforts. Some might argue the 1996 Telecommunications Act succeeded despite itself, for example. Innovation came not so much from telecom competition but from product substitutions based on mobility and the internet, it can be argued.

If you remember the major revision of U.S. telecommunications law called the Telecommunications Act of 1996, you will remember the practical consequences of deregulating the local telecom access business. 

Revising U.S. law, the Act enabled competition for local telecom services, lawful operation and ownership of Class 5 voice switches, the right to sell customers voice and other services and wholesale access to incumbent networks. 

All that happened just prior to voice communications reaching a historic peak about 2000, with a rapid decline. Most incumbent telcos lost 35 percent of their customers for that service in 10 years, as much as 65 to 70 percent over two decades. 

Service providers also lost half their revenue from long distance calling over that same period. 

source: CDC, Statista 

At the same time, other big changes in end user demand were happening: substitution of mobile phone service for fixed service; use of mobiles instead of cameras or music players, GPS devices or video screens. 

source: Wikimedia

There also was increasing use of the internet as a substitute for a wide range of other activities and products. In 1996, for example, it is estimated there were 36 million global users of the internet, representing less than one percent of the world population. A decade later, that had grown to 17 percent. 

About that time, some 14 percent of the U.S. population was using the internet, on dial-up connections. A decade later, that had grown to about 66 percent. 

source: Pew Research 

The point is that disruptive changes in regulatory framework can produce outcomes we did not expect, especially when disruptive enabling technologies happen at the same time, allowing massive product substitution and behavioral changes. 

The same thing might happen with 5G. It arrives in tandem with other key technologies and platforms, including commercial artificial intelligence, edge computing and internet of things. It may, in the end, be hard to separate the various threads from each other. 

In part, that is because computing architectures shift over time, oscillating between centralized and decentralized approaches. That puts computing resources at different places within the architecture, fluctuating between centralized and decentralized designs. 

In the mainframe era, computing resources were centralized at far ends of the network. That shifted in the client-server era to more local processing on devices themselves or on local servers. In the internet era computing switched back to far end hyperscale data centers. 

source: GSMA 

But most observers believe we are now in a stage of shifting more workloads back locally, to take advantage of artificial intelligence, heavy local analysis of sensor data to support the internet of things and compute-intensive applications using virtual or augmented reality. 

“These days lots of companies want to turn bandwidth problems into compute problems because it’s often hard to add more bandwidth and easier to add more compute,” said Andrew Page, NVIDIA media group director of advanced products. 

So maybe 5G will ultimately not be the big story. Maybe other simultaneous changes will provide the most-consequential effects. Put another way, 5G might not be as transformational as edge computing, applied artificial intelligence or IoT.

By the 6G era, network slicing and heterogeneous access might turn on to be more consequential than mobile platform performance. Perhaps value will have migrated further in the direction of orchestration, and away from underlying facilities.

So 5G might be part of a consequential change that we are not deliberately planning.

Bernie Ebbers Dies. For the Last 50 Years, Much of the Telecom Industry Also Died

Bernie Ebbers, WorldCom founder, has died. In some ways, WorldCom was emblematic of a frenzy of super-heated growth efforts in many parts of the telecom business around the turn of the century. 

The year 2000 also was notable as it represented the absolute peak of the traditional voice business in the U.S. market. After 2000, every part of the U.S. voice business began a long, steady revenue and subscriber decline. 

Though the company was marred by a major accounting scandal that sent him to prison,  Ebbers began building WorldCom by selling long distance voice services in 1983. Through a string of acquisitions, WorldCom even purchased the former MCI in 1998. In 2000 Worldcom tried to buy Sprint as well, though that deal was scuttled by regulators.

For some of us, the $35 billion acquisition of MCI was a landmark, as MCI is the firm that first brought competition to the U.S. communications services market, challenging then-monopolist AT&T with a private line running between St. Louis and Chicago in 1969. 

Think about it: until 1972, AT&T did not even have a marketing department. What would have been the point for a monopoly communications supplier whose profits were a guaranteed rate of return on its investments? 

Until 1968 AT&T was the sole supplier of U.S. telephones, transmission cables, switches, software and services for most of the United States. No other firms were allowed to attach devices to the AT&T network until after 1968. 

But the 1969 Carterphone Carterphone decision allowed use of third-party acoustic modems on the AT&T network. 

MCI also launched legal efforts that most would agree lead to the 1982 Modified Final Judgment that ended the AT&T monopoly, and the 1984 birth of legally separate Bell Operating Companies and AT&T, launching the era of competitive telecommunications in the United States and elsewhere. 

As with the later Telecommunications Act of 1996, is the first major overhaul of telecommunications law in almost 62 years, competition was the key objection. But something funny happened. Everyone thought the point was introducing competition into the voice business. 

By about 2000, the whole voice business began declining, with the internet emerging as the key feature of the next era of telecommunications and applications. Since 1968, the whole presumed point of competition was lower prices for long distance calling, local telephone service and third party supply of phones. 

In his 1986 book The Deal of the Century, author Steve Coll predicted that “AT&T will find itself along in the basic long distance market by the end of the century.” 

In truth, none of the former giants of the long distance business survived. 

By 2005, AT&T had been acquired by SBC Corp., one of the former Baby Bells. MCI was acquired in 1998. And Sprint, whose long distance business became a revenue footnote, was acquired by Softbank in 2012, primarily for its mobile business. 

The big takeaway from decades of telecom deregulation is simply to note that nearly every major telecommunications regulatory effort since 1968 (about fifty years) aimed in some way to introduce more competition into the voice business. 

Along the way, the business itself shattered. There is at present almost no upside to further efforts to “deregulate voice,” which has ceased to drive industry revenue or consumer demand. Voice is an essential function, but not the key revenue driver. 

Equally crucially, the universal use of internet protocol means we have formally divorced application ownership from network ownership. All telecom networks now are essentially “open.” Any lawful app provider is free to use the networks. 

So while innovation is virtually limitless, network access profitability now is a new issue. Telecom operators used to develop, own and profit from every app on the network. These days, connectivity suppliers profit only from a few owned apps, and they are never the sole suppliers. 

It is not clear what the next 50 years will bring. But the general movement has been towards products, services, revenues and profits shifting to third party users of connectivity networks. 

Along the way, some connectivity providers also have shifted their own revenues in that direction. Over time, it is possible that much of the “connectivity function” is subsumed into “functions that support our business model,” which might be advertising, e-commerce, marketing or some other activity. 

So advertising-driven Google operates its own data centers, subsea networks, fiber to home networks, Wi-Fi networks and mobile networks, and builds its own computing, mobility and content acquisition devices. 

Google develops or experiments with novel internet access platforms using balloons, satellites or unmanned aerial vehicles and creates its own content services. 

Amazon’s e-commerce model requires it to operate its own data centers, subsea networks, a private content delivery network, video and audio services, devices and apps. 

Facebook runs its own data centers, subsea networks and satellite networks to support its advertising business. 

It is hard to see those trends abating. Nor does it seem unreasonable to expect continued pressure on the connectivity provider business model, as revenue growth is slowed by competition and customer saturation. 

Worldcom and MCI were part of a huge change in the telecom business few expected. Functions might remain, but huge entities might continue to find themselves challenged to survive in the old ways.

FNB Connect Voice Revenue 30% to 40% of Total: What Next?

Voice accounts for about 30 percent to 40 percent of FNB Connect total revenue, the firm says. FNB launched its own mobile service in 2015. That points out a salient fact for the telecom industry: voice once generated the bulk of revenues, but now is an essential function, but less a revenue generator. 

In 2016, for South Africa as a whole, mobile operators made about 53 percent of total revenue from voice services. Mobile data services contributed 38 percent of total revenue, text messaging about seven percent of total revenue. 

But voice revenue is declining fast, globally. Using 2008 as a baseline, by 2013, five years later, a number of tier-one service providers had lost between 20 percent and 55 percent of legacy voice revenues. 

source: Juniper Research

Looking back over a longer time frame, in the U.S. market, one can see that 2000 was the year of “peak voice” for long distance revenue earned by local telcos. The usage drop over about a decade from 2000 was more than 50 percent. The revenue drop tracked usage decline. 

source: FCC

source: FCC

Mobile service providers in Asia might face similar pressures on revenue. My general rule on revenue earned by service providers is that telcos must expect to lose about half their legacy revenue every decade. The U.S. experience with revenue loss provides one example, but each nation and market should be able to find similar changes. 

That of course creates the necessity of developing big new revenue sources to replace those lost revenues, and in turn reflects the product life cycle in general. Intel, for example, seems to exhibit that same general pattern. 

Im 2012, for example, Intel earned nearly 70 percent of revenue from “PC and mobile” platforms. By 2018, PC/mobile had dropped to about half of total revenue. By 2023 or so, Intel should generate 60 percent or more of total revenue from sources other than PC/mobile.

The point is that any service provider that intends to make a living “sticking to its knitting” and selling connectivity products has to account for the shrinking demand curve. To be sure, new connectivity products are being created. Software-defined wide area networks provide one example. 

But that will not be nearly enough. The challenge is to replace half of total revenues from legacy sources. SD-WAN revenues available to service providers presently do not exceed a couple billion dollars a year. Total global revenue is about $1.5 trillion. That implies a need to discover or create as much as $750 billion worth of new revenue over the next decade, globally.

Is 2019 the Year of Peak Satellite?

It appears 2019 could be the peak year for satellite TV services globally, as Rethink Technology Research believes subscribers will begin a permanent decline in 2020, with a loss of about 15 million accounts by 2024, on a current base of about 225 million.

Still, that represents a cumulative loss of about six percent to seven percent over five years, a rate of attrition executives in the telecom industry have dealt with before. In other words, the transition away from linear TV services--using fixed or satellite networks--will be a longish, slowish transition reminiscent of the decline of international long distance revenue, fixed line voice or text messaging.

source: Rethink Research

Consider a simple five-year estimate of revenue changes in the U.S. telecom market. Revenue changes less than one percent, but the volume of revenue from growing and declining contributors changes from negative five percent to positive 24 percent.

Basically, voice and messaging revenues drop, while data revenues, business segment and video entertainment revenues climb.

source: Analysys Mason

As former Cisco CEO John Chambers was always fond of saying, transitions are the key to success. “Market transitions wait for no one,” Chambers said. In 2011, perhaps it would have been thought unremarkable to assert that “voice will be free.”

In 2000, at the very peak of U.S. long distance revenue, it might have seemed more outlandish.

source: FCC

Of course, that was only part of his thinking. "It wasn’t just voice that will commoditize and be free. Data transport will commoditize and be free and then video will commoditize and be free,” Chambers has argued, referring to the transmission business, not the content business.

Platforms Really Do Matter

Soon enough, we will be trying to make predictions about the impact of 5G on fixed network internet access lines, on end user typical speeds, typical retail prices, video entertainment accounts and service provider market shares. It is going to keep us busy, as few trends will be stable.

And platforms really do matter.

It is hard to overemphasize the importance the cable industry has had in driving U.S. internet access services. Cable has been the market share leader since about 2000. Telco fiber to home connections have grown, but growth has been relatively slow. Digital subscriber line has declined, with satellite connections reaching a peak of about three million before seemingly settling back to about two million accounts.

source: USTelecom

Many of us believe 5G will be a bigger platform innovation that cable's hybrid fiber coax network was.

One basic rule I use when evaluating service provider business models is to assume that tier-one service providers lose about half their current revenue about every 10 years, and therefore have to replace more than that amount of revenue to sustain growth. The rule likely works even for small independent service providers (I haven’t tried to quantify that historically, mostly because I do not have access to enough data).

source: USTelecom

It is easy enough to quantify what happened in the U.S. voice market. By 2000, mobile already represented about 34 percent of all voice lines, though arguably these were additional to the installed base of fixed network lines.

By 2018, fixed network providers have perhaps 25 percent of total lines, while mobility represents 75 percent of accounts. And in 2018, it is clear that mobile has become a substitute for fixed line voice service.

source: USTelecom

We saw this trend in long distance services, various enterprise data services, fixed network voice, now mobile voice and messaging, entertainment video and even glimmers in the internet access area.

As 5G is commercialized, we almost certainly will see mobile substitution for fixed network internet access, though it is hard to quantify the amount of change. But voice substitution provides possible guidance.

In the U.S. market, a substantial portion of U.S. consumers now rely exclusively on mobile internet access. In fact, such mobile substitution already represent as much as 20 percent of U.S. households, says the CTIA. In some segments, such substitution might be higher, as much as 35 percent.

source: CTIA

So one might ask the question of how much further that trend can go, as 5G is commercialized, and major service providers begin to actively market 5G-based services that compete directly with fixed network internet access services.

We already know what happened with voice. The portion of U.S. households that rely on mobile-only  telephone service grew from three percent in 2003 to 53 percent in 2016, US Telecom says, using Federal Communications Commission data.

So it would not be far fetched to suggest that at least half of all existing fixed network internet access connections could eventually be replaced by wireless or mobile alternatives.

What is the Relevant "Mobile" Market; What Will it Be in a Few Years?

Regulators and lawmakers always face challenges when markets are fast evolving. When the first major comprehensive reform of U.S. telecommunications law since 1934 lead to the Telecommunications Act of 1996, the changes focused on enabling more competition for fixed network voice services.

With hindsight, we can see that this was just at the point that mobile was about to become the preferred means for consumers to use voice services. In other words, lawmakers decided to open up competition in a market that was about to shrivel.

source: CTIA

According to Federal Communications Commission statistics, fixed network voice reached a peak around 2000, just a few years after the Telecom Act was passed.

https://www.slideshare.net/CommsDay/commsdayunwired2015-bob-james

The Telecom Act also was passed just several years before use of broadband internet access grew from about 15 percent of U.S. homes to perhaps 65 percent a decade later.

source: Pew Research Center

So the point is that it is going to be hard to make rational decisions about competition and market structure in the U.S. mobile business given possible huge new changes in those markets as well.

It is not clear whether other facilities-based providers will want to enter the mobile business. Nor is it clear how such facilities would be sourced. It is reasonable, many believe, to expect possible entry by one or more cable TV companies or app providers

Facebook, Apple, Amazon, Netflix and Google “have to do something at some point,” argues  Bob Paige, Vertical Bridge EVP.

So the issue is market structure. Is the relevant market mobile service providers, facilities-based providers, all local access providers or something broader, including both app and access providers? “

And even if we can only predict that markets will converge, when will that happen on such a scale that applications and access literally are one cohesive market?

Something of the same process arguably applies to application markets, where many call for breaking up firms such as Google, Facebook, Apple and Amazon. But that also assumes the existing markets will not themselves be further disrupted, leading to a new set of leaders.

That always has happened when new eras of computing arrive. The leaders of the legacy era have never been the leaders of the new era of computing.  

2018 Global Telecom Revenue Trend is Unclear

Whether the global telecom industry will see revenue growth or revenue decline in 2018 is unclear. Analysts at the Economist Intelligence Unit expect a two percent decline in global revenue in 2018. Others expect slight growth, overall.

Older forecasts have tended to predict continued revenue growth. The issue is whether trends  are breaking, in an industry that has seen only growth for over a hundred years.

Fixed line voice accounts peaked between 2000 and 2003 in most developed markets, for example. Long distance revenue peaked in the U.S. market about 2000 as well. Mobility drove growth for the past few decades, globally but account saturation in developed markets has generally been reached.

According to the Organization for Economic Cooperation and Development, 2008 broke the growth trend as that apparently saw peak revenue, at least on a short term basis (seven straight years).

The hope, of course, is that big new sources of revenue will emerge in the 5G era, particularly related to internet of things apps and services. But we are years away from assessing the validity of such hopes.

In the meantime, developing Asia will continue to see stronger growth, while Europe probably will decline further.

source: OECD