ARPU Will be an Issue for 5G

One way fixed network operators have had an advantage over mobile operators is the ability to create differentiated offers for internet access. It is common to find fixed network internet service providers offering a range of speeds, and a range of prices.

You might well wonder why mobile operators have not done so. Technology constraints are the issue.

That regime has not developed in the mobile market (for reasons related directly to the way radios are used in mobile, compared to fixed network customer premises equipment.

Fixed network modems are “nailed up” to specific locations and accounts. That means different offers can be created and supplied.

Use of mobile radio resources always is temporary. Radio resources are allocated and then released on a routine basis, over a period of minutes or maybe hours, with lots of contention for ports. So it simply is inefficient or impossible to offer dedicated speeds.

There are other differences. Retail pricing in the fixed networks business often is by "speed." Higher speed tiers cost more. Retail pricing in the mobile business is by "consumption." Retail pricing is based on actual or expected usage (Gigabytes used). 

To some extent, fixed network ISPs have been able to justify investment in "faster speed" in a couple of ways. Taking market share is probably the biggest reason for doing so. But consumers, over time, also have shown willingness to spend more, to get faster speeds. 

In the mobile business, the upside has largely been in terms of consumption or overages. Speed has not proven a dependable, long term method of gaining and holding market share. Coverage, and the consistency of coverage, arguably is more important, in that regard. 

So the issue is whether mobile internet incremental revenue has grown, in direct proportion to incremental cost. That might be debatable.

By some estimates, revenue is developed nation markets has been remarkably flat, in recent years, despite mobile data revenue growth. The reason is that voice and messaging revenues have fallen almost as fast as mobile data revenues have grown.

source: Strategy Analytics

The point: ubiquitous gigabit speeds might not boost average revenue per account as much as you think.

source: Strategy Analytics

What if 5G Produces No Net Revenue Increase?

The conventional wisdom is that 5G is going to create new revenue sources for mobile operators. That undoubtedly will prove true, to an extent; and perhaps to a significant extent.

What remains unclear is whether 5G actually will produce a net increase in mobile broadband revenues, even if 5G produces a gross increase in such revenues.

In other words, on a net basis, it is conceivable that 5G literally produces no net gain in access revenue. The reason is that, unlike the case in the 3G era, the 5G mobile internet market is going to operate in a mature environment in most markets.

In the transition from 2G to 3G, one might note an overall increase in mobile operator revenues, as the internet access market was young. By the time 4G arrives, growth mainly is substitution, not net growth. That is likely to be the case in the 5G era as well.

To wit, new 5G revenues will include some element of actual growth (IoT subscriptions, for example). But many of the 5G accounts will simply be substitutes for existing 4G subscriptions, so there will be no net gain in subscriptions.

Some will hope for higher average revenue per account. Initially, that could happen. But ARPU will fall fast. So, on a net basis, it is possible there will be no actual gain in mobile data or total mobile revenue.

Some might well ask, “then why do it?” The simple answer is that “doing nothing” might plausibly result in serious negative revenue growth, which is worse than “flat revenue.”

source: Strategy Analytics

No Good Retail Pricing Options for One Small Telco

Ogden, Utah is a one-square-mile town with about 823 households, Ogden Telephone Company is the entity providing fixed network communications services to “over 1500 households and businesses” in Boone County, with internet access speeds up to 200 Mbps, costing between $30 a month for 3-Mbps service up to $330 a month for the 200 Mbps version.

Residential phone service retails for about $30, after the taxes and fees. The firm also provides video subscriptions, supplied over a fiber-to-home network. And there is no local cable TV operator competing for customer attention.

Apparently, customers not choosing a bundle including voice service now have to pay an $80 fee. Other telcos seem to “solve” their revenue problems in similar ways, charging more money per-unit for purchases of “naked internet service” without voice than for a bundle including two or three services.

Sometimes, especially on promotional plans, the cost of buying voice service is low enough to entice customers to buy a triple play plan.

Now, though, it appears Ogden Telephone charges customers who do not buy voice service a fee of $80 a month. Obviously, it makes more sense to buy voice service even if a customer does not plan to use it.

The plan obviously is going to irk customers who otherwise would not buy a voice line. Telco executives are likely to say they have an investment in fixed infrastructure that has to be covered. That is true enough.

But there are other ways to structure retail fees, within regulatory reason. Stand-alone service price could be raised, with discounts on full bundle purchases. Charging a basic “network connection fee” with additional sums for discrete services is likely not lawful. Perhaps none of the alternatives are ideal.

And that is the larger problem. One might question the future viability of most smaller telcos in the United States as all legacy services mature and as service alternatives proliferate. Ogden does not seem the type of community where a new competitor would want to build a fixed network.

So wireless or mobile alternatives, some more exotic than others, would seem to represent the hope for heightened competition in the market.

One is not popular suggesting that, in many situations, any fixed network solution is the “wrong” way to supply communications services in the 21st century. Nevertheless, that might become a reality. And even that outcome might be debatable, in many nations, as even mobile or wireless access businesses face revenue and profit pressure.

Simply stated, without subsidies, there is no viable business model for many rural and small telcos. Those problems are exacerbated as consumer demand for telco products shifts and drops.

What Verizon's Pole Attachment Stance Tells You

For every public purpose there are corresponding private interests. Consider pole attachments.

Attackers generally support less-costly, simpler, faster processes for gaining the right to string communications cables on telephone and light poles. Incumbents generally oppose such moves, as faster, easier, cheaper pole attachments mean more potential competition, faster.

Of course, interests are not simple. Cable TV companies, which once were attackers, argued for simpler pole attachments, until they became incumbents. Now the tier-one cable companies oppose “one touch make ready” and other measures to ease the process of creating an access network.

But even in the tier-one incumbent arena, business interests vary. AT&T generally opposes such measures, while Verizon now supports easier pole attachments. There is a simple reason. AT&T has the largest fixed network footprint, and so is an incumbent in much of the United States.

Verizon, in contrast, serves a relatively small portion of U.S. homes, so Verizon homes passed are about 21 percent of the roughly 126 million U.S. homes.

AT&T homes passed are about 66 million, or about 52 percent of U.S. homes. In other words, AT&T is the defender in 52 percent of locations, while Verizon is the defender in about 21 percent of locations.

Though AT&T already has some efforts underway to compete out of region, Verizon has the bigger opportunity out of region.

So Verizon’s position on easier pole attachments tells you at least one thing: Verizon intends to move out of region, where it will have to attach its cables to poles owned by somebody else.

AT&T likely also is planning to do so, but will defend in roughly 52 percent of cases, attack in no more than 48 percent of cases. There is a slight advantage for AT&T to take the position it does.

With 60-MHz Channels, Sprint Expects 3 Gbps to 6 Gbps Per Sector

Sprint plans to deploy Massive (multiple input, multiple output) MIMO radios with 128 antenna elements in its 2.5 GHz spectrum to increase capacity to reach 3 Gbps to 6 Gbps per sector on its 4G network, Sprint notes.

When deployed on the network, Massive MIMO can provide all mobile device users with performance improvements, and those with the latest generation of devices with the most antenna elements will see the best performance.

In recent field testing, Massive MIMO Samsung radios, equipped with vertical and horizontal beam-forming technology, reached peak speeds of 330 Mbps per channel using a 20 MHz channel of 2.5 GHz spectrum.

Capacity per channel increased about four times, cell edge performance increased three times, and overall coverage area improved as compared to current radios.

With 60-MHz channels, Sprint believes it will be able to boost capacity up to 6 Gbps per tower sector.

Millimeter Wave Moves to "Permissionless Innovation" Model

There are many ways spectrum use is moving away from command and control methods of allocation in the U.S. and other markets. As with Wi-Fi, spectrum users now are allowed rather wide flexibility of use case, devices and business models.

In other ways, spectrum sharing now contributes to that trend. The Citizens Broadband Radio Service allows blocks of spectrum to be shared between primary license holders and commercial secondary users, plus tertiary users who have best effort access on the Wi-Fi model.

TV white spaces systems use databases to allocate users and avoid interference, without fixed rules about who may use specific blocks of spectrum, and when.

As millimeter wave spectrum is released for commercial use, the Federal Communications Commission will issue flexible-use licenses as well as release huge amounts of unlicensed spectrum.

Flexible-use licenses will allow licensees to continue to innovate. Without the requirement to use particular technologies or supply particular applications.

In other words, policy is aligning to support “permissionless innovation.”

Disruption Takes Scale

Sometimes markets work. As unhappy as U.S. consumers seem always to have been with linear video services, the advent of the over the top framework is going to solve the “choice” problem. Some (industry suppliers, for example) might argue there is not a problem, given the historically high buy rates, which approached 90 percent of all homes at product peak.

At the same time, even as they bought the product at very-high rates, virtually all surveys suggested that consumers were dissatisfied. They bought, but seemed to dislike buying.

The explanation is that they had no real choice. True, they could switch from cable to satellite to telco, but the basic offers were quite similar, and there has not been too much price differentiation. Programming contracts account for much of the sameness, while “cost of goods” accounts for the roughly uniform pricing.

OTT video now offers significant choice, and more is coming. In fact, even some providers of linear TV now say the product cannot be sold at a profit, or offers very slim profits. In fact, many believe the business case for OTT video will be better than for linear video.

Though consumer happiness with subscription TV rarely, if ever, has been high, that problem is on way to solution.

Year after year, some industries simply did not fare as well as others, and subscription video has been a prime example. In fact, linear video subscription TV has in recent years ranked at the bottom (sharing that distinction with internet access services) of multi-industry satisfaction scores tracked by the American Consumer Satisfaction Index.

But that problem will be solved, to a great extent, by OTT choices being made available at scale.

And scale matters. A recent Consumer Reports survey, for example, had small providers such as EPB and Google Fiber earning the highest marks for both value and reliability. But scale is an issue. EPM only serves Chattanooga, Tenn. Google Fiber has negligible take rates.

All the linear providers with scale rank at the bottom of those survey rankings. Netflix has scale. So services such as Netflix will change the market.

We sometimes believe that small startups can disrupt whole markets. They do, but only after the firms have gained huge scale. No startup disrupted the global phone market. It took giant Apple to do that. You can make the same argument about other markets disrupted by Google, Facebook or Amazon. It takes scale to disrupt.

Thailand to Provide 10 Mbps Village Internet Access for $1.47 a Month

Thailand will connect 3,920 border villages across 62 provinces by mid-2018, providing the core network as well as one or more Wi-Fi distribution points in those villages offering end users 10 Mbps internet access service starting at 50 baht (US$1.47) per month, with unlimited data usage.

source: NBTC

Yes, Video Entertainment Revenue Easily Could Drop by Half

 With the caveat that much could, and will, happen as the subscription video business switches to an over the top model, it already is possible to predict that as much as half of current subscription revenues could be lost over a decade.

Already, consumers can spend 40 percent less, using a bundle of OTT services, compared to a standard linear video subscription, according to Federal Communications Commission data.

Those fees likely do not include the add ons (taxes, fees, box rentals, outlet charges) that increase an average bill closer to $103 a month.

Indeed, much of the total cost of a video subscription comes from regulatory fees, taxes and rental charges for equipment a consumer does not need when using a streaming, over the top approach. All of that can easily add up to as much as 30 percent of the total monthly bill, beyond the advertised subscription cost.

OTT streaming does not require rental of one or more cable TV decoders ($10 each, per month), additional outlets ($10 each, per month) and a number of regulatory fees not charged for OTT services.

The point is that it is not a rhetorical statement to argue that as much as half of all current subscription video revenue will disappear over the next decade. In fact, we could get close to a fall of 50 percent if consumers simply no longer needed to rental decoders and pay for additional outlets.

Since OTT relies solely on the internet access connection, and uses Wi-Fi for internal signal distribution, there is no outlet charge or requirement; not need for decoders or the regulatory fees.

That alone would drop gross revenue for subscription video 20 percent to 30 percent. So why bother with entertainment video, if a firm is a telco? Even at 50 percent of current revenues, subscription video still produces scores of billions of annual consumer account revenue, in the U.S. market.

Consider how hard it is to create a brand new, billion dollar a year revenue stream any other way. It is worth it, especially as voice and messaging clearly are headed for a 50-percent reduction as well.

source: FCC

Cisco Incorporates Machine Learning (Artificial Intelligence) in New Network

Machine learning (artificial intelligence) continues to be deployed in practical ways, including by Cisco routers and networks.

Cisco calls this intent-based networking and it incorporates machine learning to “create an intuitive system that anticipates actions, stops security threats in their tracks, and continues to evolve and learn.”

At least in part, the new network is built for pervasive computing, supporting enormous scale in terms of devices. “The new network provides machine-learning at scale,” Cisco says.

“We must move to a place where we build technology that is intuitive from the start and continues to evolve and learn over time,” says Cisco CEO Chuck Robbins.

“The new network delivers a world where you can connect billions of devices, identify them almost instantly, know what’s trustworthy and what isn’t, and draw exponential value from the connections – and you can do it in hours instead of weeks and months,” Cisco says.

Intent-based networking supports “a network with a purpose, one that can think ahead.”

Interpreting data with the right context is what enables the network to provide new, more meaningful insights, Cisco argues.

Will Microsoft Catch AWS in 2018?

Amazon Web Services leads the infrastructure as a service market, a finding virtually nobody would challenge, at least for the moment. For the moment, the  issue is Microsoft’s role in IaaS, as it is, according to Gartner, the leader in best position, at the moment, to challenge AWS.

“AWS remains the dominant market leader, not only in IaaS, but also in integrated IaaS+PaaS, with an end-of-2016 revenue run rate of more than $14 billion,” Gartner says. “It continues to be the thought leader and the reference point for all competitors.”

By way of comparison, Microsoft Azure is second in market share, with revenue run rate of about $3 million. That suggests annual revenues higher than $12 million.

source: Gartner

What Will Drive Future Telco Revenue?

Internet access is the anchor service for both fixed and mobile service providers, if only because those two services generate the bulk of service provider revenue in many markets, and because video depends on high-capacity internet access.

AT&T’s first quarter 2017 financial results hint at the contribution made by video services, which drove 32 percent of total revenues. For Comcast, the cable communications business that corresponds to AT&T’s business had 45 percent of revenue driven by video, while 27 percent was driven by internet access.

It remains to be seen whether internet access revenue contribution will be greater than content revenues, in most markets, eventually. It is virtually certain that voice, no matter how important, is destined to shrink, as a revenue driver.

What is happening is that all legacy services are mature, or maturing. That suggests, eventually, that some new revenue contributor will emerge.

source: Comcast

What Will Video ARPU Be, in the Future?

Only a few telecom products ever have been universally adopted by consumers. Voice, messaging, mobility, internet access and video entertainment are those products. Everything else is a niche. The paucity of universally-demanded services illustrates the problem of new service creation. It never has been easy, and will not be easy.

At the same time, it is easy to illustrate the new range of universally-demanded services, such as social networking, search and shopping, supplied as apps accessible “over the top,” and not intrinsically bundled with an access service.

Given the historic high demand for network-delivered content (video, especially), it comes as no surprise that OTT entertainment video services are so popular. As was the case for use of voice, new forms of highly-popular services (mobile voice rather than fixed) have much-higher value for consumers.

A majority of U.S. online consumers, for example,  now subscribe to at least one paid OTT video service, according to researchers at IBB Consulting Group.

About 33 percent of those subscribers buy two services and 18 percent subscribe to three or more services.

Some 63 percent of paid OTT subscribers also subscribe to a linear TV service from their cable, telephone or satellite provider.

What is not yet clear is how demand for “live” events and programming will develop. Up to this point, the largest streaming services have offered pre-recorded content. Only recently have services that deliver “real time” programming begun to be widely available.

To the extent that all OTT video services involve bundles of some sort--either bundles of pre-recorded content or bundles of “live” channels--one major question for suppliers is the future shape of bundles (large or small numbers of networks, live or pre-recorded content, content genres).

The biggest questions concern channels that mostly rely on “live” content, as it is somewhat obvious that pre-recorded content is “best” or “easily” delivered using some on-demand format. News (for some) and sports (for more) provide the clearest examples of content venues especially leading the “live” category.

At least so far, buying behavior suggests that for “libraries of content,” a price of about $10 a month for an OTT service is viewed by consumers as reasonable. Since about 60 percent of consumers buy both linear and at least one OTT service, current propensity to buy represents something north of $90 a month in total spending.

The big issue for OTT is whether average spending ultimately is closer to $10 a month than $100 a month. Many of us would argue the eventual result is a blended average revenue per user close to $50 a month, including $40 a month for a skinny linear bundle, plus at least one OTT service at $10 a month.

What is not clear is whether video suppliers can dramatically change the perceived value proposition. If so, ARPU could stickier on the high side. What the subscription video industry hopes will result is that when a big bundle is purchased, all or most of that content also can be viewed on a streaming, over the top basis. That would tend to maintain current spending levels.

On the other hand, most consumers do not view most channels, creating constant pressure to craft more affordable, smaller bundles that meet the needs of most consumers.

source: IBB Consulting

"Like and Dislike" Often Tell Us Nothing About Future Behavior

Consumer research always is difficult, but it is more difficult when questions about “value” are asked independently of price and other attributes. Consider the oft-noted observation that people hate ads.  In the abstract, and all other things being equal, that seems true enough.

But “liking or tolerating ads” is something different, if the issue is free content or “free functionality” in exchange for the ads, then people, even when not fond of ads, will tolerate them, within some reasonable bounds.

So people may not like ads, but will tolerate them so long as they see tangible benefits in exchange. That noted, there is a value-price relationship that content providers and advertisers have to be aware of.

Consumers will not tolerate  “excessive” amounts of advertising, or “highly intrusive” forms of advertising, repeated too often.

The point is that asking consumers what they like, and do not like, in the absence of value and cost considerations, will nearly always fail to capture or predict actual behavior.

Asking a typical consumer whether they “like ads” does not provide valuable insight. Behavior depends on the full value-cost relationship. Most consumers will tolerate some advertising to obtain free content or use of apps, with no major issues (think of Facebook, Google or other ad-supported services and apps).

Consumers might also say they prefer “no ads” experiences. But behavior depends on the mix of value obtained and costs paid to have an “ads-free” experience. Perhaps few consumers would choose “no ads” experiences if it meant substantially higher cost to use their favored apps and services.

It is generally true that consumers “hate advertising.” It also is true that those attitudes do not generally matter, when ads support free use of apps and services they value.

Design Element	Users Answering "Very Negatively" or "Negatively"
Pops-up in front of your window	95%
Loads slowly	94%
Tries to trick you into clicking on it	94%
Does not have a "Close" button	93%
Covers what you are trying to see	93%
Doesn't say what it is for	92%
Moves content around	92%
Occupies most of the page	90%
Blinks on and off	87%
Floats across the screen	79%
Automatically plays sound	79%

source: Nielsen Norman Group