No Business Model for 5G?

It always is difficult to fully anticipate the business value provided by each successive generation of mobile networks. There always is a stated business case, of course. From the first generation to the second, the advantage was the transition from analog to digital, with the advantages that normally represents.

The shift from 2G to 3G was supposed to be “new applications.” That eventually happened, but not right away. First mobile email and then mobile Internet access were new apps of note, though the use of mobile hotspots also was an important development.

The shift from 3G to 4G generally was said to be “more bandwidth” supporting new applications.

Video apps generally have been the most notable new apps, compared to 3G, although user experience when using the Internet also is far better with 4G. And though it often goes unnoticed, 4G speeds have allowed any number of users to substitute mobile for Internet access.

More U.S. households now seem to be abandoning even fixed Internet access in favor of mobile access, as it now is common for households to rely on mobile voice (more than 46 percent of U.S. households now are “mobile only” for voice) , instead of fixed network voice, or over the top video entertainment in place of traditional subscription services.

In fact, because of mobile use, fixed network Internet access rates actually are dropping in the United States, having reached an apparent peak in 2011.

source: NTIA

Still, it is reasonable to argue that there is not yet a clear business case for 5G. But some might argue that has been the case for at least two successive generations of mobile networks. Both 3G and 4G were supposed to lead to development of many new apps.

That has happened, but mostly because of the contributions of third party app developers. On the other hand, both 3G and 4G have offered efficiency gains, something of clear importance for a mature business featuring high competition and therefore margin pressure, plus declining revenue from the legacy apps.

“The business reality is that there is no new money,” argues William Webb, CEO of Weightless SIG and a communications consultant. “So either 5G will need to be delivered within the confines of current operator revenue or it will need to deliver new services that consumers are prepared to pay more for.”

To some extent, both requirements (“no new money” and “new services needed to boost revenue”) likely will be part of the eventual business case.

Actually, one might argue that the percentage of household income devoted to mobile communications actually has grown over the last decade. So there actually is some amount of “new money” being devoted to mobile services, even if that comes with less use of other services, such as fixed network services.

To be sure, U.S. consumer spending on communications is a relatively small portion of household spending, too small to be broken out by the Bureau of Labor Statistics, for example.

In most U.S households, and definitely for households with more than the “mean” number of household members (2.5),  spending on mobile services virtually certainly outpaces spending on all other services, as well as topping spending on component subscriptions (high speed access, all entertainment video and fixed network voice).

From 2007 to 2014, expenditures for mobile phone services increased from a range of 38.7 percent for one-person consumer units to 70.9 percent for consumer units of five or more persons, according to the U.S. Bureau of Labor Statistics.

Also, mobile now represents 73 percent to 80 percent of total household spending on communications.

One-person consumer units have the lowest share of cellular expenditures compared with telephone service expenditures for all household size groups, but the share increased from 49 percent in 2007 to 64.3 percent in 2014.

In contrast, fixed network voice accounted in 2014 for just about 27 percent of household spending. The perhaps-obvious question is how much is spent on high speed Internet access, something hard to glean from Bureau of Labor Statistics data.

More significantly, BLS data shows that U.S. household spending on communications is growing, and has been growing since 1990.

source: Bureau of Labor Statistics

In the United Kingdom, households spend between three percent and four percent of income on communications.

Source: Ofcom

source: Bureau of Labor Statistics

In households with five or more people, mobile accounts for about 80 percent of spending on “telecommunications.

source: Bureau of Labor Statistics

The other issue is whether new services will develop that generate more revenue. That is an open question at the moment. But many argue that Internet of Things apps will drive additional service revenue, while customers are showing willingness to spend more money for faster Internet connections, as well.

Of course, there are regional variations. Average revenue per user, or per account, has shrunk in Western Europe, but climbed in the U.S. market.

And there are other complications. Smartphones tend to have much higher ARPU than tablet connections. Internet of Things connections are expected to have lower ARPU than tablets. So revenue per account and revenue per connection will diverge.

In my own household, ARPU (per device) is relatively stable, but the revenue per account has grown, as more devices have been added, and bigger usage allowances have been purchased.

The point is that there is evidence of growing household spending on mobile services, and at least a pathway to new spending on new services. There will be a business model for 5G. It might take some time to develop in a clear way, though.

The other angle is that mobile networks get replaced about every 10 years, so the revenue from the older generation of networks is captured, and built upon, by the new network.

In other words, revenue shifts from older networks to newer networks, which also tend to be more efficient, and therefore less costly. That tends to be the case even under new circumstances, where legacy revenue sources are replaced by new sources.

Mobile voice and messaging revenue, for example, is dropping in many markets, but mobile Internet access revenue is growing. The issue is the magnitude of blended revenue.

Even without knowing the particulars, some of us would argue that, as a shift to gigabit access in the fixed network will lift ARPU, so too will gigabit access in the mobile network.

What is Telco Equivalent of Automaker Investments in Ridesharing?

How to deal with disruption of one’s legacy business is never as easy as it seems. Facing over the top voice competition, some telcos tried creating their own branded OTT offers, without notable success. Others tried to do so with messaging, again without notable success.

At least so far, some of the most notable “new service” initiatives have involved taking market share from other providers (telcos getting into entertainment video; cable TV companies getting into voice).

The notable exceptions have come in Internet access and mobile services. Both provide the best examples of a new service that achieved ubiquity.

Cable TV firms, on the other hand, have been successful at creating or buying content assets, which providers something of a model for an investment approach for telcos.

So far, access providers have not taken one possible approach, namely taking minority stakes in leading OTT firms.

Auto manufacturers are taking a slightly different approach, investing in the ridesharing firms the automakers believe could disrupt the “car ownership” market. That approach is akin to Microsoft buying Skype.

At least so far, though, the auto investments represent an approach telcos and other access providers have not achieved, the equivalent of AT&T and Verizon becoming minority investors in Google, Facebook and Netflix.

We might yet see something on that model in the Internet of Things arena, though. The key will be a willingness to accept minority ownership, with the corresponding lack of full control.

What we generally have not yet seen is a willingness on the part of some access providers to envision a major change in business model and ecosystem role.

Auto manufacturers actually are investing in ridesharing services because they fear the auto sales business might shrink. So they are hedging by investing in transportation services, rather than vehicle sales.

Driverless cars will be the determining factor if car ownership declines in favor of ride-hailing services, many believe, in large part because removing the need for human drivers can sharply lower costs.

The cost of owning and driving a car an average of 15,000 miles per year in the US is approximately $0.57 per mile driven, according to AAA.

UberX costs $2.15 per mile in New York City and UberPOOL costs $1.61 per mile.

However, if a ride-hailing company could cut the driver out of the equation with driverless vehicles, it could undercut the cost of owning a car.

The parallel shift, for an access provider, would be a shift towards ownership of content and application assets, rather than sales of access services.

As unlikely as that seems, it represents the hedge automakers are making with their ridesharing investments.

Automakers are redefining themselves, in part, from being in the "making cars" business to being in the "transportation" business. The issue is whether service providers can recraft at least some portion of their business from "access" to "apps."

"Wearable" Value Proposition Seems Unclear to Most

A new study of wearable adoption suggests the value proposition is a bit unclear. “Of all the users of wearables surveyed, around one in 10 said they no longer used their wearable devices, with one third of these owners abandoning them within a couple of weeks of purchase,” said Ericsson.

So, at least so far, it does not appear that wearables--especially watches--are the "next big thing."

Ericsson says abandonment rates are declining, but user expectations also are rising. A common cause of dissatisfaction is feeling tethered to their smartphone.

Among those who have abandoned wearables, 14 percent did so because wearables were lacking standalone connectivity.

source: Ericsson

In fact, 83 percent of all smartphone users surveyed expect wearables to have some form of standalone connectivity.

When asked what form they would expect this connectivity to take in the future, around 40 percent of existing wearables owners and 46 percent of non-wearables users preferred Wi-Fi and cellular connectivity, with existing users expressing a two times higher preference for built-in mobile connectivity compared to non-users of wearables.

On the other hand, the cost of an additional mobile data connection charge is a barrier to wearables use. About 33 percent non-users indicated that the cost of keeping digital devices connected is a key reason why they haven’t invested in wearable technology.

The survey also suggests consumers believe additional drivers, such as personal safety, could be future adoption drivers by 2020. Demand for a wide range of other potential use cases seems unclear, in the medium term.

source: Ericsson

As was the case for the smartphone, which functionally displaced use of other consumer devices (cameras, clocks, GPS devices), many consumers and industry executives believe wearables could replace a wide range of other existing devices.

source: Ericsson

U.S. Fixed Network Internet Access Actually is Dropping

More U.S. households now seem to be abandoning even fixed Internet access in favor of mobile access, as it now is common for households to rely on mobile voice, instead of fixed network voice, or over the top video entertainment in place of traditional subscription services.

In fact, because of mobile use, fixed network Internet access rates actually are dropping in the United States, having reached an apparent peak in 2011.

source: NTIA

Those sorts of trends pose key questions for service providers and regulators, since one has to ask important questions. If consumers are abandoning the fixed network, making the business case more difficult, what is the appropriate service provider investment strategy?

What is the right regulatory approach for services that are declining? Even if “parity” of regulation makes sense when technology platforms change, how much additional cost should regulators be placing on declining services--even services based on the newer platforms?

In an almost-unnoticed trend, more U.S. households, in every income bracket, are going “mobile-only” for Internet access at home, in 2015, compared to 2013.

In fact, says the National Telecommunications and Information Administration, between 15 percent and 29 percent of surveyed households now rely solely on mobile platforms for Internet access.

That trend has been gaining strength since at least 2011.

Trends such as the substitution of mobile for fixed access now have altered, or are poised to alter, the methods people use for voice, messaging, TV and Internet access. That has clear implications for service provider strategy and investment and for regulation of fixed services as a whole.

Some of us would argue that it makes little sense to apply more burdensome regulations on platforms that are in decline. Likewise, if the shift is to mobile and wireless communication, then it makes sense to continue allocating more bandwidth for mobile and wireless access.

There are a whole range of subsidiary issues where such choices must be made.

The U.S. Federal Communications Commission wants all ISPs offering IP-based voice services to provide battery backup, as legacy “plain old telephone service” has been line powered.

Frontier Communications says there is very little demand for battery backup for VoIP services, a finding that is consistent with prior consumer behavior.

That position is not surprising, as any universal battery backup plan would impose additional cost. Cable TV providers, for example, seem to have no objection to offering optional battery backup, but oppose mandatory backup for all carrier IP voice lines.

Frontier argues (as have cable TV operators for years) that, even when offered for sale, consumers do not generally buy battery backup services.

Frontier, in fact, argues, that few of its customers actually buy an IP telephony service, in marked contrast to cable TV operators and “fiber to home” providers, which universally offer IP telephony as their only voice option.

Frontier’s experience, in large part, also shows that the company continues to rely on legacy voice, instead of offering IP telephony. In large part, that is because the company does not use fiber to home platforms on a ubiquitous basis, which virtually requires that voice be provided using IP telephony.

Frontier notes that, according to the FCC’s most recent voice telephone services report, for all ILECs nationwide there are only 26,000 residential customers that actually use an OTT interconnected voice (IP telephony) product.

That hardly seems right, but appears to be a definitional issue. The FCC reported there were 48 million interconnected voice subscriptions in use by December 31, 2013. So Frontier clearly is using some definition of “connected voice” that is different from that used by the FCC.

That noted, given the prevalence of mobile service, rare in the extreme is a household that actually relies solely on fixed network voice.

Roaming Rate Controversy Illustrates "Large Carrier, Small Carrier" Economics

In wholesale communication markets, it matters whether a supplier is small or large, and whether most traffic is on-network, or off-network. At any given level of rates, smaller carriers will have a larger percentage of traffic roaming off network, while larger networks will tend to have less roaming traffic, all other things being equal.

That is a controversy within the European Union as regulators move to institute a complete ban on roaming tariffs for voice, text  and mobile data, by June 2017.

As you would guess, smaller service providers and larger service providers with high amounts of customers who roam are at odds about the actual remaining roaming rates. Within the EU, the big divide is between net receivers and net providers of traffic.

Operators in countries with lots of incoming roaming traffic such as Spain, Greece and France want high wholesale rates.

Operators in countries with low domestic rates and whose customers travel a lot, such as Baltic and eastern European countries, want low rates.

Wholesale prices are currently five euro cents a minute for calls, two euro cents for text messages and dive euro cents per megabyte of data.

Small carriers, with small customer bases, typically “send” more traffic than they “receive,” meaning in this instance that high rates are costly, as they will “get” less inbound roaming traffic (and revenue) than they send, and buy.

That is an issue for mobile virtual mobile networks, for example.

Some would argue that Internet interconnection involves the same traffic and cost dynamics, even when regulators ignore such differences. In other words, all other things being equal, large networks tend to accept more traffic than they send to smaller networks.

Small networks send less traffic to larger networks than they receive from large networks.

The big exception is content networks, which virtually always send more traffic than they receive. In fact, it is correct to say there are, among network types, "customer networks" operated by retail Internet service providers that mostly receive traffic, and "content" networks that mostly send traffic.

One might argue that the costs of unbalanced traffic are insignificant. That might be more true of the server and interconnection costs. It is manifestly untrue for ISPs that have to build gigabit and higher capacity access networks.

source: European Commission

Will 28 GHz Work for Consumer Gigabit Access?

“Will it work?” is a question more executives are going to be looking at, where it comes to fixed wireless platforms for Internet access. Technology issues (coverage, rain fade, interference) are important, as always.

Just as important are the payback questions: can the new networks deliver enough bandwidth, far enough, to be a functional substitute for fiber access, at prices consumers will pay?

Executives have been asking these sorts of questions for decades.

If you have been around long enough, you have seem several iterations of the “fixed wireless is the answer” for access operations, for a number of potential audiences and customer segments, in a number of different settings.

The rise of competition in the long distance voice communications business was pioneered by Microwave Communications Inc. (MCI), which used point-to-point microwave to compete with the AT&T system in the 1980s.

Also in the 1980s, point-to-point microwave was seen as a platform for educational TV. The MMDS bands (2.5 GHz to 2.7 GHz), also originally licensed for educational TV, were repurposed for delivery of multichannel television subscriptions. Now those bands are available for mobile communications.  

Sprint is a major holder of former MMDS spectrum, for example.

Fixed wireless now is enjoying something of a renaissance, as firms including Google, Facebook, Verizon and AT&T now are testing new forms of fixed wireless, including but not limited to use of new 5G spectrum, and also millimeter wave bands.

The attractions are the same as ever: fixed wireless promises lower deployment costs and access to additional customer locations that otherwise would lack a payback model.

That is especially important for fixed network providers faced with higher levels of competition, and therefore lower potential addressable market, higher risks of stranded investment and growing demands for consumer bandwidth at gigabit speeds.

The value is highest for providers not using the cable TV hybrid fiber coax platform, which can reach gigabit speeds on already-deployed platforms.

Some tests suggest signal propagation at 28 GHz will not be as big a problem as many fear.

In fact, the LMDS band has been available for decades, originally as a platform for TV distribution, and later viewed as a platform for high-bandwidth communications for business customers in urban markets.

What remains unknown is how much propagation distances might change as 28 GHZ is adapted for small cell network architectures, instead of point-to-point links. In an earlier period, reach of 1.5 miles was routine for point-to-point links, and distances up to three to five miles sometimes were possible.

In a new small cell deployment, transmitting at lower power, distances of 1,000 meters (about 0.6 miles) might be reasonable.

We do not have all the answers, yet. What we do know is that reasonable people believe technology advances will offer a better solution than possible in the past, just at a point when gigabit speeds are market necessities, and deployment costs are more crucial than ever.

High Speed Access Top of Amenities List for Renters, Study Finds

High speed access is among the top-two amenities for an apartment rental, a study by RVA for the FTTH Council suggests. Both potential renters and property owners rank high speed access at the top of a list of amenities, along with in-unit washers and dryers.

The study provides “direct evidence that satisfaction with broadband correlates with overall MDU property satisfaction itself.”

As always is the case with arguments and beliefs about the role of Internet access as a driver of economic growth or social well-being, correlation is not necessarily causation, a fact briefly noted by the study.

But “causation is not proven,” the study says.

Though we always act as though high speed access matters for economic activity, learning and social well-being, about all we really can say is that there is a correlation. We cannot prove causation.

Nearly 40% of All Internet Users are Members of LinkedIn

Time will tell whether Microsoft can spin value out of its LinkedIn acquisition. But LinkedIn's reach is impressive: nearly 40 percent of all Internet users appear to be members of LinkedIn, according to GlobalWebIndex. 

iPhone Prices Could Rise $60 to $80 for a "U.S. Made" Device

source: MIT Technology Review

Domestic production of iPhones with simple U.S. assembly could add $30 to $40 to the retail cost of devices built and sold in the United States, an analysis by MIT Technology Review suggests. If component parts also could be built domestically, retail prices could rise another $30 to $40.

Complete domestic sourcing is impossible, since the component rare earth elements are not found in the United States. The bottom line: if an iPhone were made of as much domestic components as possible, and fully assembled in the United States, an iPhone might cost $60 to $80 more than at present.

Smart Cities Proposal Shows How Hard it is To Envision, Much Less Create, Any Part of a Smart City

Denver’s proposal to the  U.S. Department of Transportation as part of its Smart City Challenge might show why smart city programs are such complicated undertakings, under the best of circumstances. The DoT program will award one U.S. city about $40 million for a smart city project, with an expected award of up to $10 million also provided by Vulcan.

In fact, it probably is a bit of a misnomer to talk of “smart cities.” Instead, there are lot of potential ways intelligence, big data and sensor networks can actually produce valuable outcomes.

But those real outcomes are going to be few and far between for some time, because the infrastructures do not yet exist.

What Denver wants to do first is “establish a robust data management and sharing platform that will connect disparate data sets from multiple agencies.”

That information will be made available in the form of mobile apps and at kiosks, integrating information about  the city’s five car sharing and three ride sharing companies with the bicycle program and the city bus and rail services.

Denver also proposes to electrify taxi and City vehicle fleets and introduce wireless charging (including for transit buses). Useful, but not necessarily “smart.”

The proposed project also will test autonomous vehicles, introducing autonomous elements to fleet and transit vehicles while testing autonomous vehicle business models. Also useful, but not something that will affect consumers.

Denver proposes an integrated data system that would draw real-time information from many sources, providing a detailed picture of travel through the city.

That, in turn, is supposed to support programs that give residents and commuters access to more transportation options, initially. Useful, but essentially an “uber app” (in the sense of amalgamating and integrating other exists information sources, not in the sense of the ride-sharing app).

Eventually, the information system is seen as supporting “smart vehicles” and autonomous vehicles.  to the street grid and to each other, helping to pave the way for self-driving cars. Again, useful, but not something that will be seen or touched by citizens and users.

Some elements focus squarely on making it easier for residents of low-income neighborhoods — especially those without credit cards or smartphones — to connect with ride-sharing services such as Lyft, check out B-cycle bikes or find other ways to fill in transit gaps.

There will be some visible changes: charging stations and information kiosks. Lots of sensors likely will be deployed to gather and update the information base. But most consumers will “see and use” a new transportation app.

The project would convert a significant percentage of the city’s fleet vehicles to electric power. That leads to a greener city, but is it necessarily a “smart city” development?

More electric vehicle charging stations would be added. An additional 15 miles of new bike lanes would be added per year. Both good things, one might argue. But hardly “smart.”

Many of the other outcomes are process related, such as creating a policy and regulatory environment inviting for automated vehicles, or create plans for an 80 percent reduction of greenhouse gas emissions by 2050, supporting efforts to increase bike and pedestrian commuter mode share to 15 percent by 2020, or reduce single-occupant vehicle mode share to 60 percent by 2020.

The project also implements a safety program to reduce and ultimately eliminate vehicle-related crashes, injuries and fatalities.

The point is that the “smart” part of the projects involve collecting and making information available.

Most of the other activities are not necessarily “smart,” but green. There is nothing wrong with that.  But it does suggest how hard it will be to create even one element of a smart city (in this case, smart transportation).

AT&T Will Likely Have to Boost FTTH Investments to Meet FCC Requirements

At some point soon, AT&T likely will have to hike spending on fiber to home passings if it is to satisfy a Federal Communications Commission condition that is part of the FCC's approval of AT&T’s purchase of DirecTV.

The approval includes a requirement for AT&T to add 12.5 million fiber to premise locations and 13 million fixed wireless connections.

The fiber to customer deployments are supposed to happen over a four-year period, including about one million by the end of 2016.

Some question whether that is going to happen, and how soon, given fixed network capital investment of about $2 billion a year at the moment.

In addition to boosting capital spending, AT&T might be banking on the ability to build more affordably than was the case when Verizon Communications installed most of its fiber to home networks.

Indeed, Verizon’s unexpected decision to deploy FiOS in at least some neighborhoods in Boston suggests something has changed in the perceived business model.

Perhaps one key element is the difference between cost to “pass a location” and “cost to connect a customer.” AT&T could pass many more homes than it “connects,” as perhaps half the total cost of activating a customer is related to installing drops and network interface units for each paying customer.

The amount of deployed capital therefore includes a fixed element (fiber pass a location) and a variable component (cost to activate a location).

Forced to predict, some of us would argue that many more passings will be covered than “connected,” as initial take rates for consumer optical fiber connections can be as low as 20 percent in the first year.

So, of 100 locations passed, about 20 will require additional capital to activate. Assuming new deployments are targeted neighborhood by neighborhood, where propensity to buy is the highest, the amount of stranded capital is reduced.

Back in 2008, it might have cost $3,800 just to pass a location. Now it might cost $600 or less per passing. But you can see the reason for skepticism in some quarters.

It might cost $600 million to pass a million homes, at $600 per passing. At $500 per passing, it still costs $500 million to pass a million homes.

Using the $500 per passing figure, AT&T would have to invest at least $1 billion in capital to pass two million homes. On an annual fixed network capital budget of $2 billion, that suggests AT&T might be able to add about two million passings a year.

That works out to a total of about eight million over four years, short of the total of 12.5 over four years.

So, yes, one might argue, capital investment would have to climb beyond $2 billion a year to satisfy the FCC requirements.

App Store, Google Play to Boost App Provider Revenue Share to 85%

source: Nielsen

Driven by marketing concerns, both App Store and Google Play are poised to raise the share of revenue going to their app store partners. Apple plans to boost app provider share of revenue from 70 percent to 85 percent, if an app can maintain a subscription from a customer for at least a year.

Google Play also is said to be planning an increase in app provider share up to 85 percent.

Apple’s move seems driven, in part, by a new focus on growing subscription revenues. Google likely is moving more to keep pace with the App Store. Both, in doing so, will strengthen their dominance of the app store markets.

source: Wall Street Journal

Growing competition from Amazon likely also is a factor. But the shift of app revenue to developers will likely increase developer commitment to both platforms.

The new revenue splits might be especially interesting for content providers, especially streaming video providers. Sales of streaming content subscriptions is becoming more important for content owners and distributors.

Value-Added Services--Free or For Fee--Boost Retention, Data Consumption, Perceived Value of Mobile Services

Value-added services--provided at no incremental cost as part of a mobile subscription--possibly can increase retention by about 11 percent, boost customer perception of network quality by about 55 percent, and boost data consumption by about a gigabyte each month.

In mature markets, offers are focused around video and music streaming services, primarily as a way of affecting customer perceptions of network quality or value.

That is one example of the way access providers partner with app providers to provide services that are seen to boost perceived value.

source: Nokia

Another important strategy involves creating and selling for-fee services, which might range from branded video or audio streaming to connected car services, home security and eventually, other Internet of Things or machine-to-machine (industrial Internet of Things) services.