What 4G Tells Us About Future of 5G

If our experience with 5G is anything like 4G, business model assumptions will include:

• Build it and they will come
• Cost to deliver a retail gigabyte to customers will drop
• Revenue for delivering a retail gigabyte will not increase
• Any new “killer app” will be discovered: we do not know what it is, yet
• “Dumb pipe” still will drive most of the growth, but managed services will drive most of the gross revenue (globally).

The mobile industry has tended to replace its network by a “next generation” network about every decade and nobody seems to think that will end.

Though the phrase “build it and they will come” (hope, in other words) is a discredited business model in many quarters in the wake of the Internet bubble around the turn of the century, it rather neatly captures actual reality in the mobile business.

Every next generation network has, in fact, created its own demand. So, in truth, a change in demand by consumers almost never is the actual business rationale for shifting to a next generation network. More often, next generation networks are preferred because they help mobile operators run networks that are more efficient, and therefore potentially more profitable.

The formal justification for building the next generation network often hinges on new revenue sources or ability to raise prices. Our experience with 3G and 4G is that this expectation was largely unfulfilled.

As a practical matter, whatever is possible as a matter of technology platform, prices have been falling, largely due to increased competition. So the expectation that a next generation network leads to an increase in retail prices per gigabyte is going to be dashed, if in fact anybody actually thinks that can happen. So revenue per delivered gigabyte will remain flat, or possibly even drop a bit.

But the supplier cost to deliver a gigabyte will drop with 5G, perhaps not by an order of magnitude, but by hundreds of percent. One might well argue the actual driver for 5G is benefits for suppliers, not end users, even if end users are going to experience more value.

That is what has happened for any number of earlier mobile technology innovations, including signaling systems, the switch from analog to digital switching, better air interfaces, better radios, faster backhaul, signal compression, processing and storage costs.

Many now say 5G will enable many new Internet of Things applications, though the emergence of alternate networks focusing on low-bandwidth, low power consumption networks designed to support sensors suggests IoT might be a significant new market, if not necessarily an application unique to the 5G network.

Other big new applications might yet emerge from 5G. But that was said about 3G, and did not happen until relatively late in the platform lifecycle. Internet access, and especially use of video has emerged as the “killer app” for 4G.

We cannot really predict what might emerge from 5G (even if hopes are pinned on IoT).

And even if it will make sense, and likely happen, that mobile operators actually create some new managed services delivered over 5G and 4G networks, most of the revenue, and the foundation of the business model--in terms of revenue--will still come from “dumb pipe” Internet access.

Managed services such as voice and text messaging still will be significant, and still drive most of the gross revenue in many markets.

But revenue growth will hinge on Internet access revenues. And that, by definition (because of current interpretations of network neutrality rules), means “dumb pipe.”

source: ITU

Global Voice Revenue is Dropping, As Total Revenue Grows

Any way one looks at the matter, global telecom service revenues derived from voice are shrinking, even as global service revenue grows, the result of more subscribers and new revenue sources, especially mobile data and Internet access.

source: ITU

Huge! Verizon Communications to Build FiOS in Boston

This is huge: Verizon Communications, which had halted its FiOS program in 2010, is going to rebuild Boston with FiOS. Boston was among a notable number of major Verizon markets that Verizon concluded it would not upgrade for fiber to the home services. In addition to Boston, Buffalo, N.Y. and Baltimore are some of the larger cities that did not get FiOS.

But Verizon now says it will build FiOS citywide, spending more than $300 million over six years to do so.

The network will offer speeds up to 500 Mbps.

Initially, the project will begin in Dorchester, West Roxbury and the Dudley Square neighborhood of Roxbury in 2016, followed by Hyde Park, Mattapan, and other areas of Roxbury and Jamaica Plain.

At least in part, the change might be the result of an expedited permitting process that has allowed other Internet service providers, such as Google Fiber, to build faster and at lower cost.

It is possible that Verizon has concluded the business case for FiOS now has changed for additional reasons beyond the lower make-ready costs.

The strategic rationale might now also be more significant, irrespective of any improvements in the payback model. Use of the fixed network to offload mobile data traffic arguably is more important.

Use of the fixed network to support mobile backhaul operations from small cells might be a new driver on operating cost front.

Also, by now it is clear that high speed Internet access is the anchor service for a fixed network, and that Verizon must be competitive with cable TV offers and those of other ISPs if the economics of a fixed network are to work at all.

Stranded Assets Affect All Key Parts of the Telco Business Case

Stranded assets are a huge business model problem whenever a monopoly communications business becomes competitive. Stranded assets--network facilities that drive zero revenue--also directly related to market shares, gross revenue, profit margins, marketing, capital investment and operating costs.

Which is to say, the key drivers of the business. Though well understood now, the fundamental change in access network economics was not immediately and universally understood.

Consider any one-product service provided by a single provider with 80 percent installed base or take rate. Add one competent new supplier, and theoretical “maximum” share for each provider drops to 40 percent. Add a third competent supplier and theoretical maximum share drops to 33 percent.

That change alone would destroy the original economics and business model. Triple play now is foundational because it directly addresses competitive market dynamics: three products can be sold to a smaller number of potential customers.

If each unit sold (for example) is about $40, then per-account revenue could be $120, not just $40 if a single product were the only supplier option.

But stranded assets remain a problem, which is why Google Fiber and so many other gigabit providers now pre-qualify areas for network upgrade or build based on expected demand. That avoids expensive investment where returns are likely to be low or negative.

In that sense, telco access network ubiquity might actually be a negative, not a positive.

“The ILECs’ low cash flows reflect the continuously increasing cost of sustaining a ubiquitous network that is now serving roughly a third of the lines for which it was engineered,” argues Anna-Maria Kovacs. In other words, 66 percent of the deployed network does not actually generate revenue.

In other words, when the percentage of customers on the network is about one out of three locations, most of the network access investment is stranded. Dead. Inert. Not producing revenue.

“At the 2015 ILEC penetration level of 35 percent of peak, total network cost per remaining subscriber has essentially doubled and the networks passed the inflection point beyond which penetration losses result in catastrophic cost increases,” says industry analyst Anna-Maria Kovacs,  visiting senior policy scholar at the Georgetown Center for Business and Public Policy.

By way of contrast, cable TV networks still are operating in the flat part of the cost curve. That is a function of having paying customers on perhaps 80 percent of passed locations.

Metro access providers and business communications specialists such as Zayo and Level 3 have more ability to target investment. So, less risk of asset stranding.

Perhaps you can imagine a scenario where telco stranded asset problems lessen. In an optimistic scenario, telcos create or discover some new unique application that drives take rates back over 50 percent.

In a negative scenario, stranded assets are not an issue in the case of market exit. Verizon, for example, with a relatively small fixed network footprint among tier one providers, might welcome a chance to exit the fixed network business entirely, as a facilities-based provider.

That doesn’t mean Verizon would have no chance to sell services to fixed network customers of its choosing. It would simply lease those assets, probably at favored rates as part of an asset divestiture.

Lack of willing and able buyers, plus regulatory opposition, make that an unrealistic possibility for the moment.

The stranded asset problem is not going to disappear, or lessen, in terms of intensity. The only issue is what ultimately is done to “make the problem go away.”

If Low Cost Provider Wins, Cable TV Beats Telcos

In any competitive market, including consumer, small and medium business and parts of the enterprise communications markets, the low-cost provider tends to win.

Telcos are anything but the low cost providers.

Consider free cash flow margin of telcos and cable TV companies in the U.S. market, for example. Where Verizon fixed network margins are about eight percent, and AT&T margins about 12 percent, Level 3 Communications gets 16 percent, Cogent Communications 20 percent and Zayo about 22 percent cash flow margins.

Charter Communications has cash flow margins of about 13 percent, Cablevision Systems Corp. and Time Warner Cable get 18 percent, while Comcast earns 27 percent.

You might argue that Level 3, Cogent and Zayo have an advantage, and they do. They can pick and choose their markets and serve enterprises and other carriers, rather than consumers.  That tends to contain cost and boost gross revenue per account.

It also seems to lead to higher cash flow margins, though not as high as the cable TV providers are able to produce.

source: Anna-Maria Kovacs

The issue is how market dynamics change over time. A safe prediction is that cable TV operators, now turning  their attention to the enterprise customer segment, will gain share, likely at the expense of telcos.

That should, all other things being equal, lead to even more pressure on AT&T and Verizon fixed network profit margins.

Is T-Mobile US Disruptor Role Right for Netherlands?

Necessity might be the mother of invention, but having a role model helps. So it is that Deutsche Telekom, which tried and failed to sell its Netherlands mobile business, possibily is  looking at replicating the T-Mobile US approach in the Netherlands.

As in the U.S. market, DT wanted to sell its business, and could not do so. But DT apparently now believes it can follow the U.S. playbook and grow its Netherlands mobile business by being

Disruptive.

Aggressive pricing and unique promotions would be key strategies. Deutsche Telekom might ultimately decide not to pursue that tactic. But something dramatic is required, even if all DT wants to do is eventually create value so the asset can be sold, something that also would follow  its U.S. strategy.

Deutsche Telekom lost more than a million mobile subscribers in the Netherlands in the past three years, but is no late entrant, having operated in the Netherlands for 16 years.

Perhaps the key difference with the U.S. market is that T-Mobile US itself become the disruptor. In the Netherlands, that role already has been usurped by Tele2 AB, as Iliad’s Free Mobile has taken that role in the French market.

source: Tele2

source: Bloomberg

Is There Competition in Special Access, or Not? We Still Cannot Agree. FCC Will Act, Either Way

Since the late 20th century, U.S. market contestants have argued about the need for regulation of special access services. We are still arguing.

But the U.S. Federal Communications Commission is planning to act, broadening the rules and extending them to cable TV operators and Ethernet services for the first time.

The particulars of the proposed new policy are not yet available. Debate will be vigorous, but Chairman Tom Wheeler has the votes to do what he wants, no matter how many in the marketplace might object.

One reason some competitors and policymakers want stronger regulation of special access services is the claimed advantage incumbent carriers have over most other competitors (other than cable TV companies, which also have ubiquitous networks), in terms of network facilities coverage.

The stated problem: “competitive carriers reaching less than 45 percent of locations where there is demand,” according to FCC Chairman Tom Wheeler.

On the other hand, AT&T has argued that “facilities-based competitors are serving 95 percent of all MSA census blocks (on average, about one seventh of a square mile in an MSA) nationally where there is demand for special access services, and, second, that 99 percent of all business establishments are in those census blocks.”

For the first time ever, the U.S. Federal Communications Commission also is seeking to extend some special access obligations to cable TV networks for the first time.

And some argue that it is impossible to fully do a data-driven analysis because the FCC is not releasing the full results of its earlier survey of facilities, an exercise intended to provide some rationale for assessing the existence of facilities-based competition.

Some might find the emphasis on extending regulation to a declining service curious.

AT&T’s access lines have declined by almost 65 percent since 2009.

So the issue is application of older rules, shaped in an era of limited competition, to Ethernet access markets that already are largely competitive, and getting more competitive.

“The new approach must be technologically neutral. Rules need to reflect today’s economy and the differences between products, places or customers, and can’t be based on artificial distinctions between companies or technologies,” Wheeler argues.

Some argue new rules, or more-extensive rules are needed in the special access market because a few incumbents still are able to exercise market power to extract higher profits.

The Consumer Federation of America, for example, argues in a study that incumbents have “overcharged” business customers about $75 billion between 2010 and 2015 as a result of market power.

But some argue the reverse case, that ubiquitous networks now mean stranded assets that are a disadvantage in competitive markets, where cable TV and other competitive local exchange carriers have higher profit margins.

Both the traditional U.S. CLECs and the cable companies who have entered the business broadband market are in good financial health and are generating higher free cash flow than the wireline segments of the largest ILECs, says Anna-Maria Kovacs,  Visiting Senior Policy Scholar at the Georgetown Center for Business and Public Policy.

CLECs and cable operators also have higher stock valuations, says Kovacs. Stranded assets, one might argue, are a large part of the problem.

“The ILECs’ low cash flows reflect the continuously increasing cost of sustaining a ubiquitous network that is now serving roughly a third of the lines for which it was engineered,” Kovacs argues. In other words, 66 percent of the deployed network does not actually generate revenue.

Traditional CLECs have focused on the business market exclusively and built out only in areas where high-density makes construction-cost relatively low and attainable-revenue relatively high.

Oddly, the “data provided publicly by U.S. CLECs and cable operators confirms the few facts that have so far emerged from the FCC’s special access data collection, i.e. that there is extensive facilities-based competition in the business broadband market,” Kovacs notes.

source: Anna-Maria Kovacs

Stranded assets are a big business model problem that has become far worse as the number of fixed networks in any market have increased, and as traffic has moved off the fixed networks and onto mobile and other networks.

“At the 2015 ILEC penetration level of 35 percent of peak, total network cost per remaining subscriber has essentially doubled and the networks passed the inflection point beyond which penetration losses result in catastrophic cost increases,” Kovacs notes.

By way of contrast, cable TV networks still are operating in the flat part of the cost curve. That means any cost-per-subscriber increase due to penetration loss is minimal.

Cable companies also are gaining share in the business communications market. Business revenues constituted roughly 11 percentof the combined revenues of Cablevision, Charter, Comcast, and Time-Warner Cable in 2015.

Their combined $9.5 billion in business revenues were up 42 percent in just two years and  MoffettNathanson Research projects that by 2019, cable business revenues will nearly double from their 2014 total.

Some argue the issue is not the existing special access market, but a maneuver by the FCC to extend regulation to more parts of the fast-growing Ethernet services market.

The U.S. Ethernet market grew 20 percent in 2015, according to Kovacs. Gartner Group estimates that enterprise spending over the 2014 to 2019 period on leased lines will decline by 18.6 percent annually.

As a result, leased lines will amount to only $3 billion, or six percent of enterprise spending by 2019.

Legacy packet services will disappear by 2016, and even IP VPN will begin to decline by 2.3 percent annually. Spending on Ethernet services, on the other hand, is estimated to grow by 9.1 percent  annually and reach $18.6 billion by 2019.

At the same time, while the prices of TDM-based services are essentially flat, Gartner expects the price of Ethernet access to fall by about nine percent per year over the 2015 to 2018 period.

The price of Ethernet WAN services will drop by about five percent per year over that timeframe.

Substitution of Ethernet for legacy leased lines makes it possible for an enterprise to increase bandwidth while cutting cost.

For example, a 45 Mbps T-3 that costs $1,400 to $2,200 could be replaced by a 100 Mbps Ethernet that costs $850 to $1700.

Savings are even greater at higher bandwidths: a 622 Mbps OC12 that costs $15,000 to $25,000 could be replaced by a 1 Gbps Ethernet that costs $1,500 to $5,200.

Given the combination of savings with greater bandwidth and better performance, it is not surprising that Gartner Group recommends that its enterprise clients replace legacy TDM with Ethernet services

U.S. Cable TV Firms Will Get 108% of High Speed Access Net Additions in 2016

U.S. cable TV companies will lead high speed access subscription growth in 2016, with U.S. telcos mostly losing customers, according to analysts at Evercore. Of an expected 3.36 million net new accounts, cable providers will gain 3.39 million.

Because of losses by telcos, cable will get all the net growth (more than 100 percent), with satellite Internet access providers adding 98,000 accounts as well. Telcos will lose accounts, on a net basis.

source: Evercore

And even if it no longer is the most-important metric, cable TV companies continue to add voice accounts as telcos lose them.

Three Merger with O2 Faces Big Obstacles; Impact, If Successful, Not Clear

The proposed merger of U.K. mobile service providers Three and O2 faces serious opposition , including U.K. communications regulator Ofcom and the U.K. Competition and Markets Authority.

Sharon White,Ofcom CEO, has argued that markets with four leading mobile networks produce prices are 10 percent to 20 percent lower than markets with fewer providers.

French regulators seem to prefer consolidation to “three.” The U.S. Federal Communications Commission continues to favor “four.”

“These questions are related because they converge around the issue of how many facilities based networks are optimal in providing competitive services in the same geographical location, a report by the Organization for Economic Cooperation and Development says.

source: OECD

Some might argue that markets with four operators, such as the United Kingdom has had, produce lower prices. What is unclear is the impact of a reduction from four to three leading operators.

“It appears from the cases for revenue trends in Austria and the United Kingdom that fierce competition from four players, in a market, does not necessarily decrease overall revenues dramatically – at least for these countries,” the OECD report states.

Australia and Austria are among the very few countries that have reduced the number of leading operators from four to three. Results are rather more subtle than might have been expected.

“While price is only one element in assessing the value provided to a customer, others being quality of service, coverage and so forth, the clear trend in Australia has been for consumers to receive less included data in their mobile bundles,” OECD notes.

“Aside from indications on prices, it is not possible to assess the overall effects in the Australian market of the reduction from four MNOs to three,” OECD concludes.

In Austria, “prices tended to continue to decline for users with larger consumption patterns and rise for those with lower usage,” OECD says, both before and after consolidation from four to three.  

IoT Market Growing 17% Annually

The worldwide Internet of Things market spend will grow from $591.7 billion in 2014 to $1.3 trillion in 2019 with a compound annual growth rate of 17%. The installed base of IoT endpoints will grow from 9.7 billion in 2014 to more than 25.6 billion in 2019, hitting 30 billion in 20201.

With the caveat that growth is occurring from a low base, IoT network connections are growing at strong double-digits rates.

To be sure, adoption of some lead IoT apps has been driven by regulatory requirements, not necessarily end user demand. The U.S. Energy Act (2007) accelerated efforts to monitor energy consumption.

Nearly a decade later, the installed base of remote-capable meters with smart grid app support is expected to reach 454 million in 2016 and to more than double by 2020, making it a leading IoT device, Verizon notes.

Likewise, the Drug Supply Chain Act requires that  drug manufacturers by late 2017 create methods for electronically transferring and storing transaction histories for their prescription drugs, including shipment information across their distribution supply chain. That is expected to boost demand for IoT sensors to track shipments.

Similarly, the U.S. agriculture and food industry is deploying sensors on an ever-widening scale to monitor key production conditions, shipping time and other metrics as a means to comply with a new and comprehensive set of reporting requirements under the 2015 Food Safety Modernization Act.

But private sector driven demand is growing. The total market size for digital precision agriculture services is expected to grow at a compound annual growth rate of 12.2 percent between 2014 and 2020, to reach $4.55 billion, Verizon notes.

One of the biggest trends in farming today is precision agriculture, the practice of sensing and responding to variable soil, moisture, weather and other conditions across different plots.

Depending on the crop, the Precision Agriculture Service can help increase overall profitability by $55 to $110 per acre, Accenture consultants say.

source: Verizon

source: Accenture

U.S. Linear Video Subscriptions Drop, Revenue Grows

Despite its mature status, linear video subscription revenue grew three percent to $105 billion in 2015 and will reach $107 billion for 2016, according to Convergence Consulting. But linear video subscribers continue to dwindle.

OTT video service revenue (from CBS, HBO, Hulu, Lifetime, Netflix, Noggin, PlayStation, Seeso, Showtime, Sling, Starz, Tribeca) grew 29 percent to $5.1 billion in 2015 and will hit  $6.7 billion for 2016.

If correct, OTT video now represents about five percent of network-delivered video entertainment revenue.

Linear video subscribers declined by 1.131 million, following a  2014 decline of 283,000.

In 2016, subscribers will decline by 1.112 million, Convergence Consulting predicts.

At the end of 2015 the firm estimated 24.6 million U.S. households (20.4 percent) did not have a traditional linear TV subscription, up from 22.5 million (18.8 percent of households) at the end of 2014.

Convergence Consulting estimates 26.7 million (21.9 percent of households) will have no such subscription by the end of 2016.

In 2014, 1.27 million more households abandoned linear TV (including both abandonment and new household formation without buying linear TV . In, 2015 2.1 million homes did so, while 2.08 million will do so in 2016.

source: Convergence Consulting