Value of Dense Backhaul and Cost of Stranded Assets Now Define Fixed Network Business Model

It is a bit of an exaggeration to say that backhaul is the purpose of a fixed network. After all, as many generations of engineers have been trained, “access” is the purpose of a fixed network, allowing customers to use the apps and features of the core network.

On the other hand, one often hears app providers called “edge providers,”defined by the Federal Communications Commission as “any individual or entity that provides any content, application or service over the Internet, and any individual or entity that provides a device used for accessing any content, application, or service over the Internet.”

That is going to strike some of you--rightly--as being excessively broad. If all users and app, content or service providers are “edge providers,” then the concept has almost no meaning, as there are virtually no instances of any entity connected to the internet other than edge providers.

In other words, our language now suggests “everything” is “edge,” and nothing is “core.” That is wrong at the physical level, and also a topsy turvy inversion of networking elements.

So the first objection to the notion of “edge provider” is that it refers to “everyone” and “everything” connected to an IP network or the internet. In a broad sense, the “role” of a consumer, the role of a content or app provider and the role of an “internet access provider” remain distinct.

Big hyperscale data centers, central offices, private and public servers operated and used by enterprises, content, app and service providers are one thing. End users are another, and the networks that connect users are different from each of those categories.

Still, in a functional sense, whatever we choose to call the facilities called the “access network,” those facilities functionally provide backhaul (or “fronthaul,” services): cell tower to switching center; radios to controllers; phones to switches or servers; PCs to servers; sensors to servers.

Functionally, it is all backhaul, even if, technically, backhaul connects the mobile network to the wired network, while fronthaul connects radios with controllers. In other words, all access is backhaul.

That is especially true now that most human being get “access” to servers and switches from a mobile device connected to cellular network radios or a Wi-Fi router. For a telecom or network engineer, “access” is a specific part of the wired network, distinct from the “distribution” or “trunking” network and the “transport” or wide area network.

In a different functional sense, access is the radio link between a device and the wired network. But the last few miles of the wired network represent as much as 80 percent of all network investment.

That has huge implications in facilities-based competitive markets, as stranded fixed network assets become a key part of the business model. “Stranded assets” are “access lines” which have no paying customers on them. In facilities-based competitive markets such as the United States, that means no single supplier typically has a paying customer on more than 40 percent of deployed facilities.

Put another way, up to 60 percent of the invested access network capital is “stranded.”

On the other hand, fixed access assets used for backhaul become more important, as small cell architectures place a premium on dense backhaul networks. So it is a safe prediction that, in coming years, the value of fixed networks will be a contest between the cost of stranded assets and the value of dense backhaul assets.

Telco Voice Stranded Assets Now About Half of all Locations

Stranded assets are a growing business model issue for large tier-one service providers. Consider that, between 2012 and 2015, U.S. fixed network switched voice connections dropped from 96 million to 64.6 million, a decline of 33 percent in just three years.

Of course, some additional lines were supplied by telcos, using voice over internet protocol platforms, so the extent of the voice services loss is less than appears, looking only at switched line loss.

The point is that nearly half of the total voice market now is supplied by attacking service providers, not telcos.

In other words, a fixed network built to serve “everyone” is used by about half of homes passed. That means the cost to serve each customer is twice as much as it used to be, as customers wind up paying for network investment that is stranded, and does not generate revenue.

Assume there are about 126 million U.S. households, about 98 percent of which are passed by a telco network. That implies some 123.5 million locations, of which perhaps 53 percent buy voice service.

That means the whole telco voice network derives revenue from about 65 million homes, or perhaps 52 percent of locations. And the problem seems to be getting worse, as consumers seem to be buying fewer telco fixed voice lines every year. For the market as a whole, that is offset by consumers buying cable TV fixed voice services, but even cable operators now are losing voice accounts.

source: FCC

For most of us, the idea that voice was a product like any other was unthinkable prior to the mid-1990s, for one simple reason: accounts and usage had risen steadily for more than a hundred years. And when use of primary lines seemed saturated, people started buying second lines. At first it might have been for use by teenagers in a household. Then demand for dial-up internet access happened. The point is that usage seemed only to move in one direction: up.

In the U.S. market, that cracked in either 2000 or 2001, depending on which data sources one looks at.

source: FCC

Global fixed access lines might have peaked about the same time. In the U.S. market, minutes of use peaked in 2000.

source: FCC

These days, nearly half of U.S.  homes (47.4 percent) had only mobile phones during the first half of 2015. At the present rate of change, sometime in 2017 it is likely that at least half of all U.S. homes will not have a fixed line telephone service.  

Also, more than 66 percent of all U.S. adults aged 25 to 34 and of adults renting their homes were living in mobile-only households.

source: CDC

source: CDC

Those are clear examples of product substitution and product lifecycles. People decided to use fixed telephony less, and mobile telephony more. Text messaging for a while was the big driver of incremental revenue in the mobile business, but that now has passed its peak, to be followed by mobile internet access as the growth driver.

Those are some of the changes we have seen over the past several decades.

Three Decades of Disruption
1980	2015
Natural monopoly	Oligopoly
High margin	Moderate to low margin
Low to moderate adoption	High adoption
Low innovation	High innovation
Stable markets	Unstable markets
Compete on quality	Compete on price
Fixed network dominates	Mobile network dominates
Tightly integrated apps and network	Open network
Owned app creation	3rd-party app creation
Sell app, use network access	Sell network access (dumb pipe)
Voice business model	Internet access, mobile business model
Similar business models globally	Growing diversity of business models
99.999% uptime	99.9% or “good enough” availability
Few lead apps	Many lead apps
IT adoption: enterprise; SMB; consumer	IT adoption: consumer/SMB to enterprise

source: IP Carrier

Changes in U.S. Net Neutrality Coming

As expected, the new chairman of the U.S. Federal Communications Commission will roll back or modify some elements of the current network neutrality rules, while shifting some enforcement to the Federal Trade Commission, while retaining the original sense of the “Internet freedoms” principles of earlier rules that emphasized the right to use all lawful apps, without blocking.

Among the bigger issues is the notion that network neutrality requires mandatory “best effort only” service for consumer users, without any allowances for quality of service mechanisms.

What is not clear is whether the present complete ban on paid prioritization (“fast lanes”) will be changed, however. It is possible, perhaps even likely, that internet service providers will be barred from providing quality of service mechanisms only for their owned services or apps. But QoS might well be allowed if all app providers can have the same QoS applied to their services as well.

The big issue is whether such entities have to pay for such features. Some of the larger ISPs maintain any app provider--including themselves--can use QoS features under the same terms and conditions any ISP applies to itself.

Most likely, the new rules to be made public in a few months, will roll back the regulation of internet access as a common carrier service until Title II of the Communications Act.

All such changes in regulatory framework can change business models, or potential business models, for the regulated actors. Ending common carrier regulation can, in principle, lead to more changes in prices, terms and conditions, at a faster pace.

As always, the degree of competition in the market will shape the direction of any such changes, and the amount of consumer welfare that might result.

Comcast Will Offer Unlimited and Usage-Based Mobile Plans

Though Comcast expects the new Xfinity Mobile service will be profitable, the biggest value is viewed as retention of customers, with the bundling of the triple play now becoming a quadruple play.

Xfinity Mobile customers will have two main pricing choice, an unlimited data plan or a usage-based plan.

The unlimited price will either be $45 or $65 per month per line up to five lines, with the lower monthly price reserved for customers on Comcast’s “best” X1 video packages.

The usage-based plan costs $12 per gigabyte of mobile data across all lines on an account, cased on actual usage.

Comcast’s prices arguably are quite competitive with prices charged by the largest U.S. mobile providers. Project Fi data costs $10 a gigabyte.

Xfinity’s unlimited plan costs $45 to $65 per line.

At launch, Xfinity Mobile is expected to support Apple iPhones, as well as Samsung or LG Android devices.

Comcast Launching its Mobile Service

At long last, Comcast is reportedly launching its mobile service, Xfinity Mobile, with a formal announcement expected shortly. Comcast’s mobile service will have nationwide coverage but is expected to be marketed only to Comcast customers, about  50 million potential homes.

Separately, Charter Communications could launch its own mobile service in 2018. In a mobile market where most of the market share is held by the top-four national providers, Comcast and Charter likely will represent the same sort of market share threat cable TV companies proved to be in the consumer voice and business special access markets.

Perhaps not many think Comcast and Charter will do as well as they have in the consumer internet access business, where the cable firms are the leading providers. But few would likely doubt that the new cable challengers will take some market share initially, and sizable share, ultimately.

Cable executives often in the past have said they would be careful about getting into yet another mature business that is fiercely competitive. And yet, that is precisely what they will be doing.

source: UBS

source: Chetan Sharma

source: STL Partners

Once Upon a Time, Voice was Not a "Product" with a Life Cycle

For most of us, the idea that voice was a product like any other was unthinkable prior to the mid-1990s, for one simple reason: accounts and usage had risen steadily for more than a hundred years. And when use of primary lines seemed saturated, people started buying second lines. At first it might have been for use by teenagers in a household. Then demand for dial-up internet access happened. The point is that usage seemed only to move in one direction: up.

In the U.S. market, that cracked in either 2000 or 2001, depending on which data sources one looks at.

source: FCC

Global fixed access lines might have peaked about the same time. In the U.S. market, minutes of use peaked in 2000.

source: FCC

These days, nearly half of U.S.  homes (47.4 percent) had only mobile phones during the first half of 2015. At the present rate of change, sometime in 2017 it is likely that at least half of all U.S. homes will not have a fixed line telephone service.  

Also, more than 66 percent of all U.S. adults aged 25 to 34 and of adults renting their homes were living in mobile-only households.

source: CDC

source: CDC

Those are clear examples of product substitution and product lifecycles. People decided to use fixed telephony less, and mobile telephony more. Text messaging for a while was the big driver of incremental revenue in the mobile business, but that now has passed its peak, to be followed by mobile internet access as the growth driver.

Those are some of the changes we have seen over the past several decades.

Three Decades of Disruption
1980	2015
Natural monopoly	Oligopoly
High margin	Moderate to low margin
Low to moderate adoption	High adoption
Low innovation	High innovation
Stable markets	Unstable markets
Compete on quality	Compete on price
Fixed network dominates	Mobile network dominates
Tightly integrated apps and network	Open network
Owned app creation	3rd-party app creation
Sell app, use network access	Sell network access (dumb pipe)
Voice business model	Internet access, mobile business model
Similar business models globally	Growing diversity of business models
99.999% uptime	99.9% or “good enough” availability
Few lead apps	Many lead apps
IT adoption: enterprise; SMB; consumer	IT adoption: consumer/SMB to enterprise

source: IP Carrier

Will Half of All IoT Revenue be Earned by App Providers?

One way to try and understand potential roles for ecosystem participants in the internet of things (IoT) area is to use analogies to existing businesses. The value chain from chips to end user applications in the internet content business can provide one example. The roles within the internet media business can provide another example.

The same thing can be gleaned from looking at the business customer ecosystem for IoT. In all cases, the customer (buyer or user) is at one end of the value chain, while chips are at the other end. That roughly corresponds to the layered open systems interconnect model, which has applications at layer seven, and cables and media at the physical  layer (layer one).

In the consumer internet content business, you can think of the actual businesses and revenue models as a sort of layer eight, where all the various technology segments come together to provide users and buyers with value, and revenue is generated. Likewise, some refer to a layer zero that includes all the physical stuff (cables, connectors, power supplies) that create a network upon which data can flow.

source: Telecom Circle

In the internet of things businesses (present and future), one can note the same set of roles, with users and buyers at a hypothetical layer eight, using applications at layer seven, with components such as chips at layer one. The large point is that all the underlying roles lead ultimately to the creation of applications, which then drive the business models and services that are monetized.

Access providers (telcos, cable TV, satellite communications) can, and often do, operate at several layers. They have historically originated the application known as carrier voice, or carrier mobile messaging (SMS or text messaging). They also have had to create the physical networks to do so. In the distant past, some might have actually created the protocols and equipment to do so. These days, third parties mostly supply the actual networking equipment and software.

In the internet era, roles mostly are separated, though. All actual businesses operate at the hypothetical layer eight. But it also is useful to think of app providers such as Google, Amazon or Facebook as operating directly at layer seven to create the apps that underlie business models.

Somewhere below layer seven are the operational activities that access providers mostly are engaged in (building and operating communication networks).

source: A.T. Kearney

The point is that although businesses and revenue streams in the internet of things or other businesses are “layer eight,” the OSI model provides a general framework for understanding where other value chain participants operate. An entity can create and supply a connected car service, industrial IoT or smart agriculture or smart home services.

Others will build business models around the sensors, the analytics software or communications networks that enable the applications.

There are some obvious conclusions to be drawn. The various internet of things applications businesses will very likely require lots of scale. As with other applications (Facebook, Google, Amazon, Netflix), a few big providers are likely to emerge, in each IoT vertical market. Most access providers will likely play similar roles as they presently do (providing access services).

That obviously limits the financial upside, but also will likely be the logical way to participate. Over time, as the businesses grow, the relative share of value and revenue available to access providers tends to shrink, even as gross revenues can grow. For most access providers, that will have to do.

A few tier-one access providers will develop other roles, though, much as Comcast has created roles for itself beyond the access provider function, as an owner of content producing (networks and studios) or experience (theme parks) assets. That is what firms such as AT&T and Verizon are hoping to do in one or more IoT verticals as well.

It is easy to criticize firms for their failures. Telcos have in the past failed at moves into the core computing business, over the top apps, data center businesses, smart home appliances or specialized communications services. Cable TV companies tried for decades to figure out a role in the mobile business, without success.

Eventually, when success has happened, it has been through acquisition, not organic growth. No  matter. Where it is possible, tier one access providers are virtually compelled to try and seek roles at the layer eight business model level related to content and applications. Those are among the bigger opportunities in almost any ecosystem where communications networks are required.

Eventually, it is possible that 93 percent or so of all internet ecosystem revenues are earned elsewhere. And it is a fair assumption that roughly half of total revenue will be earned by the application providers.

source: STL Partners