Can Challenger ISPs Compete When They Do Not Offer Gigabit Speeds?

Consumers are rational about their internet access purchases. At any given point in time, most consumer customers buy service plans in the middle of the range (price and speed), instead of the fastest or slowest tiers of service. Of U.S. and Western European accounts tracked by OpenVault, for example, about four percent of consumers are power users. 

source: OpenVault

Perhaps two percent to three percent of customers actually buy the gigabit speed tier. Globally, the 64 percent of customers buy service between 50 Mbps and 300 Mbps. 

source: OpenVault

Marketing claims by service providers notwithstanding, that is a good pattern to remember. When Verizon launched its fiber-to-home FiOS service in 2005, top speeds were 30 Mbps. Earlier FTTH deployments had a top speed of 10 Mbps. 

I recall saying, back then,  that if I ever was able to buy the product, I would do so. Fast forward to 2016 or so, when I could buy gigabit per second service, but still have not done so. 

So the clear question is “why” that has not happened, and the clear answer is that the apps I use do not actually require 1 Gbps, or even 500 Mbps. There is, in fact, no perceivable experience advantage to buying such services, at the moment. Beyond perhaps 25 Mbps to 50 Mbps per user, I am not convinced I could discern any advantage from higher speeds. 

I am fairly convinced that no application I use actually benefits from speeds faster than 100 Mbps on my end of the access connection, whether I can experience the difference or not. 

That could have implications for would-be challengers in the residential internet access business. As a practical matter, most of the addressable market--as much as 95 percent of all potential buyers--will actually buy service up to about 300 Mbps. 

So most of the market can be contested when an internet service provider provides speeds up to perhaps 150 Mbps to 300 Mbps.

Execution Risk or Mssing a Transition: Which is Worse?

Which would you rather face: execution risk or execution? Not to overplay the thesis, but the former is what telcos face in trying to move up the stack or into new parts of the value chain; the latter is the danger connectivity providers face in a world where dumb pipe (low margin) operations increasingly are the norm and legacy services are shrinking.

With the caveat that smaller specialty firms have different constraints and opportunities, tier-one telcos face big choices. 

Much hinges on one’s assessment of the ability to sustain a business on connectivity services alone (voice, messaging, internet access, internet of things), or whether sustainability eventually requires new revenue sources beyond connectivity. 

The matter is more confused than is typical at the moment because, though all connectivity providers face some risk in economies that have been largely shut down, connectivity providers with content production,  linear video, theme park and cruise operations also face the revenue -disruption from those lines of business. 

In other words, it can seem safer, at the moment, to have only connectivity lines of business. We will only know the outcome--stick to connectivity or diversify-- after a decade or more. There will be substantial execution risk. Telcos have not proven especially adept at seizing leading roles in new lines of business. 

And even early approaches by telcos towards edge computing arguably have been more “dumb pipe” than “new roles in value chain.” For most tier-one telcos, that is rational. We are early in the shift to edge computing, so opportunity and risk really have to be balanced. And, for most tier-one telcos, the upside from edge computing might not extend too far beyond the possibility of new connection revenue. 

source: PwC

Some would argue that the firms that diversified into content ownership (Comcast and AT&T, for example) have not fared as well, in the context of the Covid-19 pandemic, as did firms that are not in those parts of the business, and still make nearly all their revenue from connectivity services. 

Whether that remains the pattern after the pandemic is among the key questions. Perhaps edge computing or the internet of things will allow some telcos to create big new connectivity businesses substantial enough to replace lost legacy revenues. 

But it could also happen that, in the core connectivity business; subscription growth remains muted; average revenue per user continues to drop; profit margins remain slender or drop and product substitution continues. 

In that case, firms with more-diversified portfolios, elsewhere in the internet ecosystem, could well do better than firms limited to connectivity roles. 

What is a "Small Business?" The Definition Matters

Small business is a challenging category, as it includes self-employed people who work out of their homes, as well as the  “gig economy” self employed, So most small businesses might not qualify for assistance as part of the U.S. Payroll Protection Program, which is designed to help small businesses avoid layoffs. 

By some estimates, there are 30 million small businesses in the United States. By some estimates six million businesses have gotten PPP loans. The implication is that the program has not reached most firms. That might not be the case. 

According to the U.S. Census Bureau there are about 27.6 million total U.S. businesses and about six million companies. But only about 7.9 million locations have “employees.” Keep in mind that those figures are for all businesses, not just small businesses. 

Put another way, those 7.9 million locations of all sizes represent 131 million employees, and most small businesses have no employees.

If six million small businesses have gotten PPP funds, and there are but 7.9 million total U.S. locations with employees (enterprises and mid-sized firms plus small businesses), then it is quite possible that most actual small businesses with employees have gotten assistance. 

Assume 88 percent of all firms have fewer than 20 employees. That implies 5.3 million firms out of the total. If six million PPP grants have been made, that could imply that every firm with 20 or fewer employees has gotten a grant. 

Not having looked at the rules, it is hard to say, but since 72 percent of all businesses have zero employees, they might not qualify at all for PPP support. The latest U.S. Census Bureau data “show that more than three-fourths of U.S. businesses may be run out of someone’s home and have zero employees. 

The more-disturbing conclusion might be that many small businesses have decided not to risk accepting the PPP loans, and have instead laid off their employees, while many firms getting the PPP loans might still be considered “small,” but perhaps have more employees than 20. 

About 10.8 million U.S. business locations have fewer than 20 employees, and nearly half of those have fewer than nine employees each. 

The percentage of businesses that are home based has grown over the last decade. In 2007, more than half of all U.S. businesses were home based. By 2017, 38 million businesses were said to be home based. 

Right now, it is hard to say what percentage of “small businesses” have chosen to apply for or accept PPP assistance.

Demand for Internet Access Appears to be a Bell Curve

In 2019, about two percent of fixed network internet access accounts operated at 300 Mbps or higher, according to Ofcom. Some 16 percent of subscriptions offered speeds between 100 Mbps and less than 300 Mbps.

Fully 53 percent of accounts operated at rates between 30 Mbps and 100 Mbps. About 25 percent offered speeds between 10 Mbps and less than 30 Mbps. 

source: Ofcom

The takeaway is that U.K. consumers do not buy the fastest-available speeds and service plans. Fully 80 percent of customers buy services in the middle of the range, between 10 Mbps to less than 100 Mbps. 

That has clear implications for internet service providers and policymakers: headline speed races notwithstanding, most consumers buy services well short of the highest advertised rates. 

To the extent that infrastructure cost and speed are correlated, it might not always make sense to require or deploy facilities that push the speed boundaries. Most consumers probably will not buy them.

How Big is 5G Fixed Wireless Opportunity?

Fixed wireless based on 5G might have very different economics than older fixed wireless networks, if firms such as Verizon and T-Mobile actually can supply fixed access using the same radio network as they are building to support mobility services. 

That is the same logic behind “multi-purpose” rather than “single-purpose” networks: sell multiple products using one network. Some early modeling suggested skepticism about the business model, but there was similar skepticism about the cost of 5G networks in general, which has proven incorrect, as 5G network capex is far lower than many feared. 

Basically, if the capital investment to support mobile 5G also can be used to support fixed access, using customer premises gear only, and with no modifications to the mobile infrastructure, then the incremental cost of fixed access is “success-based.” 

We have seen this before. The economics are similar to those of optical fiber business networks in business areas, where each additional customer is served by construction of a short lateral. Most of the capex is invested in the core access network, with only modest additional costs to connect new customers. 

source: Verizon

In past years, that would have seemed quite impossible. Mobile networks could not support fixed network bandwidths at comparable retail prices. In principle, that is possible when 5G uses millimeter wave, shared or unlicensed spectrum. 

Nor must 5G fixed wireless necessarily fully replicate fixed network speeds, as most customers do not buy the “fastest” tier of service. 

By the end of 2019, for example, just  three percent of customers tracked by OpenVault purchased gigabit per second internet access. Nearly four percent bought service at between 500 Mbps and 900 Mbps. Some 11 percent purchased service running between 200 Mbps and 400 Mbps. 

About 37 percent bought service operating between 100 Mbps and 200 Mbps, while 24 percent had services running between 50 Mbps and 75 Mbps. 

“Most” consumers buy plans with features, compared to price, broadly “in the middle” of available plans. “Most” buy neither the most-expensive nor the most-affordable plans; neither the “highest usage” nor the “sharply limited” usage plans. 

source: OpenVault

source: OpenVault

The point is that a 5G fixed wireless service can be pitched to “most” customers without having to supply the fastest expected fixed network speed. 

Looking at slightly-older data by OpenVault,  in the United States and Western Europe, about 1.85 percent of subscribers tracked by OpenVault buy gigabit-speed service.

Some 3.5 percent buy services running between 300 Mbps and 500 Mbps, while seven percent buy service at speeds between 200 Mbps to 300 Mbps.

About 65 percent buy services running between 50 Mbps and 150 Mbps, Openvault data shows. 

Most people are not power users, either. Perhaps 60 percent of internet users consume less than 250 gigabytes a month. Perhaps 34 percent consumer more than 250 GB but less than 1,000 GB per month. Perhaps four percent of users consume more than 1,000 GB per month. 

source: OpenVault

The market for 5G fixed wireless might be more attractive than many suppose, even if it does not routinely offer gigabit speeds.

Most Consumers Buy Service Plans "in the Middle" of Offers

By the end of 2019, nearly three percent of customers tracked by OpenVault purchased gigabit per second internet access. Nearly four percent bought service at between 500 Mbps and 900 Mbps. Some 11 percent purchased service running between 200 Mbps and 400 Mbps. 

About 37 percent bought service operating between 100 Mbps and 200 Mbps, while 24 percent had services running between 50 Mbps and 75 Mbps. 

“Most” consumers buy plans with features, compared to price, broadly “in the middle” of available plans. “Most” buy neither the most-expensive nor the most-affordable plans; neither the “highest usage” nor the “sharply limited” usage plans. 

source: OpenVault

source: OpenVault

Looking at internet service provider data generated by OpenVault in the United States and Western Europe, about 1.85 percent of subscribers tracked by OpenVault buy gigabit-speed service.

Some 3.5 percent buy services running between 300 Mbps and 500 Mbps, while seven percent buy service at speeds between 200 Mbps to 300 Mbps.

About 65 percent buy services running between 50 Mbps and 150 Mbps, Openvault data shows. 

Most people are not power users, either. Perhaps 60 percent of internet users consume less than 250 gigabytes a month. Perhaps 34 percent consumer more than 250 GB but less than 1,000 GB per month. Perhaps four percent of users consume more than 1,000 GB per month. 

source: OpenVault

3% of Consumers Buy Gigabit Internet Access Service

Median monthly usage by broadband subscribers in 2020 is on a trajectory to surpass 250 GB for the first time, according to the OpenVault Broadband Industry report. 

By the end of 2019, nearly three percent of customers tracked by OpenVault purchased gigabit per second internet access. Nearly four percent bought service at between 500 Mbps and 900 Mbps. Some 11 percetn purchased service running between 200 Mbps and 400 Mbps. 

About 37 percent bought service operating between 100 Mbps and 200 Mbps, while 24 percent had services running between 50 Mbps and 75 Mbps. 

source: OpenVault

A 24.4 percent  increase in average provisioned speed, from 103.1 Mbps to 128.3 Mbps, in 2019 was slightly outpaced by a 27.3 percent  increase in average consumption, from 270.2 GB to 344 GB, OpenVault says. 

A median usage of 250 GB would represent a 24.9 percent increase from the 2019 median of 190.7 GB, OpenVault says. 

In late 2018, perhaps 1.85 percent of subscribers purchased gigabit-speed service. Nearly 66 percent bought services running  between 50 and 150 Mbps. Close to half of all subscribers (46 percent) bought service at speeds of 100 Mbps or higher. 

source: OpenVault