Can 5G Erase Difference Between Mobile and Fixed?

Though it is early to specify what characteristics future fifth generation (5G) mobile networks will feature, at least some think 5G will be the first next-generation mobile network with a specific applications focus and the first mobile platform that erases performance differences with the fixed networks.

Those are among some of the conclusions one might draw from the 5G “Public Private Partnership,” a new European 5G initiative.

Ironically, given the amount of present argument advanced about the need for maintaining “best effort only” access (no packet prioritization), the 5G PPP document also notes the “future challenge will be to guarantee and continuously improve customer experience offered by cloud-based services.”

“Such experience relies on the end-to-end QoS, and more generally on respective SLAs in place for a given service,” the document notes.

So there, once again, you have the inherent tension between “best effort only” access and “quality of service,” which in the 5G PPP document explicitly indicates that QoS mechanisms are necessary to ensure good end user experience.

There are, to be sure, many ways to enhance experience at the end user level. But “admission control” always has been a feature of public networks that must share key resources, and can become congested at peak hours of use.

Among other key 5G objectives is a mobile network with three orders of magnitude more capacity than was typical in 2010.

Another angle is that the 5G PPP envisions devices connecting with multiple networks over time, and possibly more than one network at any moment, meaning there will be more orchestration of access.

Whether that enhances, degrades or is neutral with respect to the “value” of networks, and how such orchestration affects the “commodity access” or “dumb pipe” position of access networks also is unclear.

Though 5G would not be the first next-generation mobile network to enable new apps, 5G arguably will be the first such network built with a specific category of applications in mind.

In some ways more dramatic, at least some observers predict 5G also will erase the distinction between “fixed” and “mobile” networks, with “capabilities and performances of mobile networks becoming similar to those of fixed networks in terms of capacity and services diversity,” argues the 5G “Public Private Partnership”  a new European 5G initiative.

That might sound fanciful, were it not the case that small cells, carrier and other Wi-Fi resources, ideally, will allow devices to interwork seamlessly, erasing, from a user standpoint, the difference between “using a fixed network and using a mobile network.”

Essentially, all those techniques shift bandwidth demand from “mobile” to “fixed” access.

The other change is the deliberate architecting of network standards to support both machine-to-machine apps (Internet of Things) and person-to-person communications.

5G will be about the Internet of Things, argues Neelie Kroes, European Commission VP. If that prediction turns out to be correct, 5G will be the first next-generation mobile network defined by applications, not just air interfaces and bandwidth.

“It will also offer totally new possibilities to connect people, and also things, being cars,

houses, energy infrastructures,” Kroes argues. “All of them at once, wherever you and they are."

One might argue those sorts of comments also are part of a political agenda. Perhaps oddly, the mobile infrastructure business now is lead by European and Chinese firms. So initiatives related to 5G arguably are part of an effort to keep Europe at the forefront of mobile infrastructure businesses in the future.

On the other hand, initiatives such as the 5G “Public Private Partnership”  also speaks to a fear that Europe fell behind in 4G device and application innovation and leadership.

And, as always, the positive impact on economic growth and jobs are part of the rationale for pushing ahead in 5G.

The document also notes why mobile data is at the heart of the proposed 5G architecture.

Within Europe, “revenue from mobile data services compensates for the declines in total spending for both the fixed and mobile voice services markets,” the group says.

T-Mobile US Wants Lower Mobile Data Roaming Costs

In Europe, mobile wholesale voice and data roaming rates have been lowered by action of the European Commission. In the United States, at least according to T-Mobile US, mobile data roaming rates likewise are dropping.

And T-Mobile US wants the Federal Communications Commission to take action to drop mobile data roaming rates T-Mobile US pays to AT&T or other service providers able to support GSM roaming.

To be sure, data roaming represents only about 0.16 percent of T-Mobile US customer data usage.

But smaller service providers typically argue they pay roaming rates that are too high, in large part because smaller networks nearly always pay more in roaming fees than larger networks pay to smaller networks.

Scale is the reason: most calls or instances of roaming will occur when smaller network customers roam onto larger networks, simply because the larger networks represent most of the customers who communicate.

Larger numbers of customers also mean lower likelihood a big network’s customers will need to access a roaming network, simply because there is a greater likelihood a called or connected party is “on network.”

AT&T has a bigger deployed network than T-Mobile US. So AT&T customers arguably will need to roam less frequently off the core AT&T network when traveling.

With a smaller network, T-Mobile US customers are more likely to need to roam onto AT&T’s networks when traveling.

Devices a Smartphone Replaces

This is an illustration of all the other devices a smartphone now replaces. source: TG Daily

For Every Public Purpose, There is a Corresponding Private Interest

Who pays for Internet access? Consumers and businesses. 

But advertisers or sponsors might pay on behalf of users of their services. Internet service providers might sponsor use of some applications. 

In some cases, application providers pay, on behalf of their customers. 

But mostly, it is end users who pay all the costs.

And though it is true that there are genuine policy issues surrounding a seemingly-endless list of "network neutrality" instances, there also are important commercial interests.

For access providers, the issue is whether apps that impose disproportionate network costs should help defray the direct costs they impose. 

For application providers, the issue is avoiding such costs, as they would directly affect app provider business models. 

And as the Internet has fragmented, there now are different kinds of Internet domains. The sort people generally are familiar with are Internet service providers who provide mobile or fixed network access. Those "eyeball" networks aggregate end users. 

Content domains are different, especially domains that supply video entertainment or video content. Such domains represent the majority of all demand on access networks. 

To the extent that ISP eyeball networks have to supply additional capacity to support such apps, the costs now are borne exclusively by end users, in the form of higher access fees. 

The issue is whether dual revenue streams will develop that resemble the way much print, TV and audio content is subsidized by advertisers. 

That notion is contentious as a matter of public policy. But the differences also reflect very real business models, and revenue and cost winners and losers in the internet ecosystem. 

As always is the case, for every public purpose there is a corresponding private interest. Proponents never directly say so. But it always is there. 

Which Analogy for ISP Interconnection: Retransmission or Carrier Interconnection?

Netflix and major U.S. ISPs use different metaphors to describe the process of interconnecting Internet domains.



Verizon, AT&T and Comcast, for example, use the analogy of carrier interconnection, where the amount of traffic exchanged determines whether any particular bilateral interconnection is settlement free (roughly equal amounts of traffic exchanged) or requires payment by the network delivering much more traffic than that network is accepting.



Netflix uses a different analogy, that of broadcast TV "retransmission fees," the fees paid by video subscription services to TV broadcasters for the rights to retransmit off-air signals as part of a video subscription.



Whatever one thinks of the reasonablenes of those analogies, there now is a huge traffic imbalance between "eyeball networks" that terminate Internet traffic for consumers, and "content networks" that deliver traffic to eyeball networks, but accept only modest traffic from the eyeball networks back to the content networks.



The reason is simple enough: content networks send video and other content to end users, but generally do not need to accept much upstream traffic from consumers, whose operations are generally confined to ordering a movie to watch or updating a play list. 

"Opportunity Cost" Might be the Biggest Downside to "Upgrading" Existing Product Lines

Marginal cost has proven to be a key concept for products sold in most mass markets, and telecommunications is not exempt from that trend.

Any number of retail prices and packages are set basically to reflect the marginal cost of adding the next incremental customer. In fact, over time, economists might argue, current retail costs for goods and services tend to move towards marginal cost.

The concept has lots of relevance in telecommunications, where large amounts of capital investment are “sunk,” and incremental usage actually imposes little additional operating cost.

The traditional way of illustrating the principle is to answer the question “how much does adding one more minute of use of the voice network cost?” In practice, the cost is almost solely limited to the cost of adding one more transaction on a billing system.

In the Internet era, we are accustomed to the notion that the next increment of usage of any consumer app actually costs the suppliers almost nothing.

In most cases, that next increment of usage costs the end user almost nothing, as well. You of course know the business problem thus created. When costs are nearly zero, retail price will tend to move towards zero as well.

As useful as that is for consumers, it is a huge problem for communications suppliers. Very low marginal cost explains why VoIP and messaging providers are able to offer their services literally for free, or nearly for free.

Low marginal cost is the foundation for the business model known as “freemium.”

Low marginal cost explains why suppliers of long distance calling, facing declining margins, try to compensate by encouraging additional usage volume.

And low marginal cost will be the reason why gigabit access services costing only $70 to $80 a month are possible, in large part.

Observers offer any number of suggestions to service providers about how to sustain their businesses under conditions where retail pricing for many products drops to marginal cost, and when marginal cost is quite low.

Many of those suggestions, though sound enough, have problems. Solutions that call for adding more value to existing products assume users will value the incremental new value enough to pay incrementally more revenue.

Strategies that call for creating new lines of business face execution risk (can telcos really do it?) as well as scale risk (will the new revenue streams be big enough to justify the effort?).

Assuming that creating new lines of business is both essential and realistic, the subsidiary issue then is how much to continue investing in legacy businesses that are declining in absolute value.

Two fundamental approaches can be taken: harvest or invest. The former essentially admits a business is mature, and will decline. The objective then is to preserve the magnitude of the revenue stream as long as possible, at the highest level possible.

The latter calls for spending more money to upgrade products, adding enough value that prices and usage can be sustained, or hopefully that usage and prices can even raised.

Low marginal cost might suggest harvesting is the more realistic strategy for most service providers. Adding more value might be capital and human capital intensive enough that the net result is a negative number.

Some of us would argue that if a given product line is powerfully affected by low marginal cost, the wiser choice is harvesting. The upside from big, or even significant investments, might not be large enough to justify the cost, time and human effort.

“Opportunity cost,” effort that might have gone elsewhere, also is a concern. No matter how large, organizations only have so much ability to invest in brand-new lines of business and revenue streams.

Must Telcos Cut Dividends and Structurally Separate Networks?

At least some small telcos that once paid rather sizable dividends have had to cut back or end such payments. 



Typically, when that happens, the company risks disruption of its owner base, as equity owners formerly buying a dividend payer are replaced by equity owners that seek growth. 



On the other hand, such moves free up capital to invest in the network. 



How well that strategy works long term remains to be seen. `But such decisions are anything but casual. 



Forrester Research analyst Dan Bieler argues that so important is the "connectivity services" function that  telcos should consider two courses of action they have traditionally opposed, namely separating network operations from retail operations, and paring back dividends.



Separating network operations from retail operations has been proposed before, and never to any widespread agreement on the part of telco executives. In part, that reflects a concern about commoditizing the access function.



Also, though, such structural separation also tends to come with greater pressure to sell transport and access services to third parties. 



Potential wholesale customers tend to argue that makes rivals "customers."  Facilities owners tend to argue structural separation eliminates a key perceived source of business advantage. 



Australia's National Broadband Network is among the more-prominent examples of the structural separation approach. Of course, that move was fought vigorously by Telstra, which arguably had the most to lose. 



Reducing dividend payments might not have direct competitive implications, but to the extent a stock price is a currency that can be used to acquire other firms, there is a negative strategic impact. 



Calls to slice dividends and separate network operations from the retail sales organization are not new. Neither are the business repercussions. 



Structural separation, and its related "mandatory wholesale" policies, arguably have proven to help competitors more than such policies help the owners of the facilities. 



The exceptions have been scenarios where the facilities owner traded vertical integration for regulator permission to enter new markets. SingTel did so. So did Rochester Telephone. 



But most telco executives continue to see more downside than upside, no matter how much advice they get to the contrary.

Could Google be Regulated Like a Common Carrier in Germany?

Google could be regulated as a common carrier or utility in Germany, if German regulators conclude Google has gained too much power and influence, a report by the German Federal Cartel Office suggests.



Such regulation could include price regulations governing prices for advertising, if regulators think Google's market position allows practices that violate antitrust rules. 

SoftBank, Deutsche Telekom Reach Fundamental Agreement on T-Mobile US Buy

With the caveat that antitrust review and clearance from the Federal Communications Commission is required, and by no means certain, SoftBank and Deutsche Telekom apparently have reached agreement on the broad outlines of a Softbank deal to buy the assets of T-Mobile US.



That would merge Sprint with T-Mobile US, the number three and number four national U.S. carriers.  



Under the plan, Softbank will buy more than 50 percent of T-Mobile US shares through Sprint, directly from Deutsche Telekom, which owns 67 percent of T-Mobile US. The deal is valued at about $16 billion.



The chances of regulatory approval are highly uncertain at the moment, though. Some might rate the odds of success as high as 70 percent. 



Others rate odds of success at about 55 percent. And some think the  odds of success are no better than 10 percent. 

A Second Wave of MVNO Growth Coming?

In January 2014, China issued 11 MVNO licences. In March 2014, Virgin Mobile acquired a MVNO licence from Saudi Arabian regulator. Those are potentially-important agreements because in many markets in the Global South, it has not been possible to lawfully operate as a mobile virtual network operator.

It is impossible to say how well such new MVNOs might fare. But past experience suggests that, in most markets, growth much beyond 12 percent customer share could be a challenge.

In 2009, for example, the market share held by MVNOs in Western Europe and North America was about nine percent, according to TeleGeography.

Globally, MVNO market share was about one percent. So MVNOs were a significant market presence only in two regions.

But logic would suggest that growth will occur in most markets globally where MVNOs either are not legal or commercially viable because carrier interest in supporting wholesale is low.

Asia is one of the regions where MVNO market share could be poised to grow from 50 percent to 100 percent annually, albeit from very-low installed customer bases.

The long-term issue is how much market share such new MVNOs might gain.

At least so far, it has proven difficult for MVNOs to break out from about 12 percent market share, perhaps because many MVNOs have focused on the “value” segment of the market, and “standard” offers from the facilities-based carriers have grown in that segment as well.

Whether that also will be the case in MVNO markets in the Global South is the issue. One might note that retail offers already are fairly aggressive in those markets. That suggests niche market strategies will be important, as the lure of “lower price” will be harder to create, than has been the case in Western Europe and North America.

By 2011, a separate analysis by Pyramid Research suggested MVNO adoption had reached about 12 percent, while in other regions MVNOs had less than three percent market share, most less than one percent market share.

That lead Analysys Mason to suggest that MVNO market share had essentially reached its limit, in Western Europe. To the extent that growth remained, it would come from wholesale-based offers adopted by device suppliers and service providers targeting market niches.

But in 2011, Scandinavian MVNOs faced falling market share. Denmark’s MVNO penetration fell to 4.2 percent from a peak of 10.9 percent.

In Finland, MVNO share fell to two percent from a peak of 11.7 percent. In Sweden, MVNO share dropped to 0.4 percent from a peak of three percent.

In 2010, there were abut 60 U.S. MVNOs in operation, according to the Federal Communications Commission. Most were quite small, but Tracfone had about five percent market share, earned by focusing on prepaid customers with low average revenue per user.

New "Information Markets" Raise Issues

Increasingly, information about products gets intertwined with the actual products, raising new legal and ethical issues. MonkeyParking, for example, is an app that allows people who are parked to alert out drivers that they are about to pull out of a spot, and allows those other drivers to bid on the right to take the vacated parking spot.



You can see the issue: such apps create new information markets whose value lies in the procurement of physical goods, such as parking spaces. 



At the heart of the dispute over these services is whether apps should be able to use a public asset to make a profit. The app developers of course argue it is information about parking, not parking, that is the foundation for the business. 

How Much Revenue can Carriers Make from Their Own Apps?

Some service providers believe they can, and must, become more active developers of applications. Telefonica and SingTel might be the best examples of such thinking.

Others have chosen to partner or acquire communications-related apps. Deutsche Telekom is a good example of that approach.

But it would be reasonable to argue most telecom service providers have not done so on a significant level, though some would argue third party development is another matter.

One can argue that is because communications service providers historically have not been good at app development or innovation, though an argument can well be made that telcos have managed a couple of key business model transitions fairly well.

The first transition was from a reliance on long distance revenue to drive profits, to mobile services. Now a transition is being made from voice revenue to Internet access and video revenue.

It would be a mistake to underestimate the significance of those shifts. Very few industries find they must replace about half their current revenue every decade or so, with revenue drivers shifting to  new products.

But one might argue the telecom industry already has been through one or two such shifts, and is in the process of a couple more similar changes.

Still, there is what might be called a structural problem.  Decades ago, communication apps were vertically integrated with the suppliers of network services. Voice and text messaging are the classic examples.

But even before the Internet emerged, enterprise and consumer apps were created and designed to run on operating systems independent of the communications infrastructure.

In the Internet era, all apps are designed to run independently of the underlying communication networks. That “permissionless”  mode of innovation means value now is created at the top of the protocol stack, or even above the stack, at what might be called the “business” layer.

But even if telcos were very good at innovating at the business and application layers, there is another problem. The app business is quite fragmented.

Consider the supply of apps in any large mobile app store. Even if a mobile service provider were to create a functioning app in any given category, that service provider’s app still has to compete against all the other apps in the category that are available in the app store.

You might argue that ownership by the firm supplying mobile Internet access and other services might be helpful. It might. But how many apps created by mobile service providers--other than the carrier’s apps that allow you to check usage and account details, or customize your access experience in some way--do you actually use?

Some of us could probably think of one or two apps, possibly quick response code readers or navigation. But many users would struggle to identify any such apps.

In other words, the “innovation and differentiation layer got unbundled,” according to Benedict Evans, Andreessen Horowitz analyst. So any "carrier-generated" apps must compete with all others.

That is a direct result of the fact that apps now are loosely coupled with communications infrastructure.

Up to a point, carriers can bundle apps with devices. But only up to a point. And users decide which apps succeed, not device or access providers.

The point is that revenue upside from carrier apps might be quite limited.

GoGo, Chevrolet Partner for Free Facebook in Flight

Gogo, the provider of inflight Wi-Fi for airplane passengers, is partnering with Chevrolet to offer passengers free access to Facebook, using Gogo, on select Gogo-equipped flights through July 20, 2014.

To reiterate, Gogo is going to offer no-cost access to Facebook on Gogo-equipped aircraft, subsidized by Chevrolet advertising. That is an example of “sponsored data,” similar in concept to toll-free calls, over the air TV and over the air radio.

It also is a concept similar to “free Facebook access” offered in some countries by some mobile service providers. Under those programs, users are allowed to use Facebook without having to buy a mobile data plan.

If it hasn’t already occurred to you, those examples do not “treat all apps equally.” The value for end users is precisely that all apps are treated differentially; that people can use Facebook in flight for no charge, even if other apps are unavailable.

Sometimes, the value of Internet access is provided by access to all lawful apps.

In this case, the value is access to a popular app in a setting where no Internet access has been available before, at no charge to the users.

As examples continue to proliferate, it will become increasingly clear that “treating all apps equally” prevents innovation that delivers value to Internet users.

Global Telecom Revenue Will Hit $4.58 Trillion by 2017

Looking at global telecom revenue over the past several decades, and considering the latest revenue forecast from the Telecommunications Industry Association, it is hard to conclude anything but that the industry grows, year over year, every year.

Where in 2008 global revenue was about $2.9 trillion, in 2013 revenue had grown to $3.87 trillion. By 2017, TIA forecasts global revenue of about $4.58 trillion.

Over nearly every time period, global telecom revenue grows. The only possible exceptions were the years 1929 and 2001, but even there the dips were relatively slight.

For that reason, many consider telecommunications “recession proof,” a theory that was tested in 2000 and 2008. For the most part, aggregate revenue remained fairly stable, though there were some changes in composition of revenues.

And that generally remains the present revenue trend, where annual revenue, on a global basis, grows about 2.7 percent.

Recessions might have impact in some regions, from time to time, slowing growth rates. But even the 2008 global recession did not halt revenue growth.

The impact of the Great Recession beginning in 2008 is easy enough to describe. According to TeleGeography Research, revenue growth slipped from about seven percent annually to one percent in 2009, returning to about three percent globally in 2011.

To be sure, growth prospects vary between regions. In fact, growth in Western Europe has gone negative, perhaps the first time in history that communications revenue, at least in a region, actually has seen a declining trend.

So it might seem odd that service provider executives worry so much about revenue cannibalization. It isn’t a misplaced concern.

As now is clear, telecom products or services have life cycles, like all other products. For more than 150 years, voice services drove industry revenues. That did not change in the 1980s, when a global wave of deregulation and privatization began.

By the 1990s, however, profit margins clearly began to erode, as competition in the formerly high-margin long distance market eroded pricing.

By the mid-2000s, growth had shifted to mobile services, even if voice was the biggest contributor even for mobile services.

Most recently, Internet access and video entertainment have been the revenue growth drivers for fixed networks.

These days, “marginal costs” often mean “marginal revenue” for service providers. To be sure, one can argue that the marginal cost of one additional minute of use of a telecom network is almost nil.

That has implications for pricing, as a provider arguably could price slightly above marginal cost and still make a profit, provided fixed costs are covered and the pricing does not disrupt pricing of existing services and products.

That is a big “if.” The traditional problem with a massive shift to VoIP, on the part of service providers, is not so much the incremental profit or loss from VoIP, but the impact on the entire installed base of customers.

In other words, it is one thing for a service provider to match market prices for over the top voice. It is quite another matter to lower prices for all carrier voice to those levels. That is why “harvesting” has been the strategy for virtually all carrier voice providers.

Service providers rationally have chosen not to formally drop prices on carrier voice, but rather have chosen to lose share and call volume, to protect what remains of the revenue stream.

The argument can be made that prices have been lowered, but only because they are effectively hidden within triple-play bundles, allowing stand-alone voices to remain largely as they were.

The other change is that some service providers have shifted to “consume as much as you want” retail pricing, instead of a metered approach. In some cases, that represents a lower effective price for usage.

In other cases, because people only use so much of a resource, effective pricing on a “per unit of consumption” basis has not actually changed so much. A customer who typically uses 250 calling minutes a month, or 2 Gbytes of data a month, or 200 text messages a month, will not generally consume much more, even if pricing shifts from usage to “unlimited” rating.

But that is one sort of issue faced by mobile service providers, namely margin pressure.

Fixed network service providers face a different problem, namely abandonment of voice services altogether, since mobile provides a substitute.

So even if both mobile and fixed network providers face issues related to the stability and growth of their voice services, mobile faces quantitative changes. Fixed network providers face qualitative changes.

Mobile customers are not abandoning voice; fixed network customers are doing so. The obvious corollary is that future fixed network service provider performance will be dictated by how well service providers can find replacement services.

Growth, in other words, is not a given. Only in Western Europe has growth actually gone into reverse. But other markets face similar challenges.

Demand for fixed network voice is dwindling. Sooner or later, that matters, unless new revenue sources--of at least equivalent magnitude--can be created.

To Make Omelets, One Must Break a Few Eggs

“Sustainability” is a bigger issue than many suppose. It is easy to decry a “commercialized” Internet, or marketplace advantages enjoyed by some firms and not all.

But valuable products and services are not produced, on the Internet, or elsewhere, without a sustainable resource model.

Innovation--creation of new apps, products and services--requires discovery of sustainable resource models.

It is one thing to bemoan commercialization. But the alternative--losing important apps, products and services--arguably is quite worse. “Commercialization” is just another way of saying a firm has found what it hopes is a “sustainability model.”

It is an odd sort of logic that sees a profusion of new apps and services as somehow diminishing the value of the Internet. To be sure, the Internet has, in a real sense, become “balkanized.” Sometimes that is by government edict.

But more often than that, people are simply making choices. They decide which apps, services and communities make sense, and then participate in those subsets of “everything” that is available on the Internet.

“Choice” is not a bug. But people intentionally make choices that effectively “narrow” their use of Internet apps and services.

That is the flip side of choice. It sometimes is argued that sustainability prevents choice.

In other words, sponsored data favors firms able to pay, which will eventually lead to smaller firms losing the ability to compete.

One might make the argument in reverse. Some firms have gained leadership in their markets because they have done a better job producing products and services people actually want.

They have “unfair” market positions because people prefer their products. That is supposed to happen. It is how consumers express their preferences.

Providing quality of service enhancements, or any number of other enhancements, is far easier for a successful firm, with lots of revenue, than for all other contenders. So long as those firms operate lawfully, and so long as markets are not overly-concentrated, that is the way much innovation spreads widely.

Only a big, powerful firm such as Apple could have revolutionized the relationship between mobile service providers and device suppliers. Only a big, powerful firm such as Google could have disrupted the U.S. Internet access market.

Some might decry “commercialization” in the same way all of us have, at one time or another, bemoaned advertising.

But sustainability requires a dependable source of inputs. All organizations require inputs.

The notion consumers and citizens are somehow worse off because new products have sustainable resource models is questionable, if not worse.

Sustainability and choice require resource models, period.

Some condemn “profits” without recognizing that every organization required inputs and resources to keep doing what they do. But a resource model is essential, whether that is grants, donations, tax revenues, profits or volunteer labor.