Is "Mobile-Only" Business Model Sustainable?

Does the future belong to “integrated” service providers that own both mobile and ubiquitous fixed network assets? It is possible, in the 5G era. The reasoning is fairly simple: 5G “requires” dense small cell networks where the trunking network (backhaul) is the key cost, not the radio network.

Even before that happens, in some regions, such as Western Europe, “market share of mobile-only telcos in Western Europe dropped from 40 percent to 20 percent of the total mobile market revenues,” according to Detecon Consulting.

There are signs of strain elsewhere as well. As strong as account growth is in many emerging markets, J.P. Morgan equity analyst James Sullivan is “bearish on wireless stocks in emerging markets.”

The problem, he argues, is precisely the amount of growth, which is fueled by an aggressive focus on account growth, irrespective of profit margins, plus the cost of supplying mobile data, relative to revenues.

But asset restructuring (mergers that reduce the number of suppliers) could make a difference, Sullivan argues.

source: Detecon

If the prediction that fixed network ownership is crucial for 5G, most mobile-only service providers will be challenged, as the cost of leasing access to support dense small cell networks will be challenging. Consider the sort of fiber deep network Verizon is building, extending the fiber trunking network almost literally “to the light pole,” or “every other light pole.”

Few, if any,  mobile-only operators can afford to build such networks. Few likely can acquire a tier-one fixed network capability and in many cases, regulators will bar mobile-only operator consolidation.

In one sense, an integrated operator might have two sorts of advantages. Mobile offers lower retail customer service costs and a growing role as a full substitute for fixed networks. But fixed network ownership allows lower trunking costs.

“Mobile operators, not required to support legacy services, require approximately one-eighth the care staff and receive half as many inbound calls per customer compared to wireline network operators,” say researchers at Detecon. So mobile access is a way to drive down operating costs, at the same time that fixed network ownership allows lower-cost trunking.  

And though it remains to be seen, 5G-based fixed wireless to support gigabit internet access might well be the most-important new revenue source available to some 5G operators, along with mobile entertainment video.

Internet of Things might ultimately prove more important, but only over a decade or so. Fixed wireless and mobile video will generate immediate cash flow.

Deep Fiber Yes, FTTH Maybe No

It is safe to say that "fiber deep" access networks are going to be essential in the U.S. access market. What is not clear is the actual deployment pattern, the required magnitude and the timing.

By some estimates, as much as $130 billion to $150 billion in additional optical fiber deployment in the access and distribution networks to support U.S. 5G and allow telcos to compete with cable TV operators, over the next five to seven years.

Some of us doubt that will wind up being the case, at least not over the five to seven year timeframe. There are several reasons. First, and most compellingly, there are rival strategic claims on available capital.

Service providers also must make strategic acquisitions to gain scale and also move up the stack into the applications and platform spaces. Tier one providers that have made big acquisitions have to pay down debt from making those deals.

Stranded assets are another issue. In the facilities-based U.S. market, any tier-one fixed network service provider has to expect to strand at least 50 percent of newly-deployed access assets. No rational executive is going to invest billions, or scores of billions, knowing that half those assets will not generate revenue.

Consider “where” new optical infrastructure is called for, according to Deloitte.

According to Deloitte, $15 billion to $20 billion is required to support densification of the mobile networks (5G small cells).

Some $35 billion to $40 billion is needed to connect rural residents. About $60 billion to $100 billion is needed to bring fiber-to-home networks or other gigabit internet access speeds to residences.

Some might argue that the capital to support mobile network densification ($15 billion to $20 billion) is essential and affordable.

What is questionable, given the opportunity to use 5G-based fixed wireless, is the $60 billion to $100 billion in fiber to home, where half the investment will be stranded, and not generate revenue. This bucket of spending is questionable.

The $35 billion to $40 billion to support rural internet access likely will prove amenable to other solutions than fiber to the home, namely wireless in several forms, or mobile networks, using fiber trunking but not fiber to the home.

The point is that huge amounts of capital will be needed to make strategic acquisitions for scale; others for scope (moving up the stack); to pay down debt and then to invest in access networks and spectrum.

Under such conditions, no rational executive is going to strand so much capital in the access network. For that reason, one might argue that the $130 billion to $150 billion investment over five to seven years is too high. Faster speeds (hundreds of megabits to gigabits per second) can be supplied in other ways that are far more capital efficient.

Mobile Hopes for a Role in Autonomous Driving are Well Founded

Ride-sharing services are seen as among the precursors of a shift to autonomous vehicles. Autonomous vehicles, in turn, are seen as one of the primary use cases of promise for mobile service providers supplying internet of things communications.

So it might be noteworthy that a recent survey of riders and former riders in Austin, Texas does suggest that ride sharing does reduce auto ownership. If one believes that autonomous vehicles will appear first, at scale, for ride services and other retail and industrial transportation use cases, that finding is important.

source: ABI Research

source: Snook & Associates  

A group of researchers looking at the suspension of Uber and Lyft services in Austin, Texas conclude that such “transportation networking companies” actually do represent alternatives to other forms of transportation, and plausibly can lead to reduced auto ownership in urban areas.

“Our analysis finds that 42 percent of respondents who had used Uber or Lyft to make a trip prior to the suspension reported transitioning to another transportation networking company as the means by which similar trips were most often made after the suspension,” the researchers said. “A near equal proportion (41 percent) reported transitioning to a personal vehicle, while three percent transitioned to public transit.”

Those findings are partly notable for the finding that just three percent of former Uber or Lyft riders chose public transit as the alternative. Some 83 percent chose either a personal vehicle or another ride-sharing service.

The survey also suggests that individuals who substituted a personal vehicle for travel, instead of Uber or Lyft, were 23 percent more likely to make more trips than individuals substituting another ride-sharing service for Uber or Lyft.

Perhaps surprisingly, nine percent of respondents said they purchased an additional vehicle in response to the service suspension.

“These results suggest that TNCs may contribute to reduced car ownership and trip making,” the researchers suggest.

5G: Evolutionary Platform; Revolutionary Business Model

Even if 5G will--if successful--be a revolution in mobile business models, its technological foundations will be an evolution from 4G. That is one of the paradoxes of 5G: it will, in many ways, be a technological evolution from 4G, but its success as a platform will be quite revolutionary.

The “5G is an evolution from 4G” trend is obvious, such as the improvement in 4G network performance. Perhaps the most-obvious developments are faster speeds, as channels are aggregated (across licensed bands as well as using unlicensed spectrum).

Where once 4G LTE speeds topped out around 75 Mbps, for example, speeds now are heading for a gigabit.

The latest advance comes in the latency area. Working with Nokia, SK Telecom has demonstrated reduced latency between an LTE handset and base station from 25 milliseconds to 2 ms.

The latency improvements illustrate another trend, namely the evolution of advanced 4G technologies to underpin 5G. Latency performance, spectrum aggregation, use of small cells and multiple input multiple output (MIMO) radios, as well as ways to use the 4G signaling network to support 5G air interfaces are examples.

The latency between the handset and base station in the existing LTE environment is around 25 ms, SK Telecom notes. Lower latency matters for some internet of things applications, especially autonomous vehicles and telemedicine.

Skeptics might argue that the ability to support 5G levels of lower latency means 5G is not needed. Optimists will say the test proves 5G latency goals can be hit, removing one more development obstacle.

At 25 ms latency, a self-driving vehicle running at 150 kilometers per hour (okay, most of us are never in vehicles moving that fast), the vehicle travels about one meter after receiving a “decelerate” message, before it actually begins to decelerate.

At 2 ms latency, the vehicle moves only 8 centimeters before it begins to slow down.

which will significantly enhance the overall safety in autonomous driving.

Where 5G--if it proves successful financially--will be quite different from 1G, 2G, 3G and 4G is its business model. All prior generations achieved success as platforms for human communications and apps.

To the extent 5G succeeds, it will be as a platform for non-human applications (internet of things).

	Speed	Latency(Handset-Base station)
2G	14.4kbps ~ 64kbps	300 ~ 1000ms
3G	144kbps ~ 14.4Mbps	50 ~ 100ms
4G	75Mbps ~	25ms or lower
5G	20Gbps ~	1ms or lower

Source: Nokia

How Much Can Bundling Boost Demand for Fixed Network Voice?

It is hard to argue with the notion that landline voice service is a clear “legacy” technology that half of consumers--or more--have decided they no longer need to buy.

A Bank of America survey of U.S. consumers found “landline” phone service was used by just 36 percent of those surveyed.

The issue is the trend: how much further can purchases fall? To be sure, many would point out that analog accounts are a declining portion of total fixed network voice lines, while market share also is shifting from traditional suppliers to competitors.

Some, such as the Telecommunications Industry Association, are optimistic, essentially arguing that voice over Internet Protocol lines will grow enough to ensure that the total number of fixed network voice lines will not decline.

It is not an impossible outcome, but likely rests on a couple key assumptions. If voice lines are bundled with other more-desired services, such as internet access, and the price is low enough, it is possible that demand can be propped up.

That often is the case for triple play bundles, where it is impossible to discern a specific price for any of the constituent products.

At a low enough price, even a product with lower usage can make sense. In other markets, including the United Kingdom, consumer use of voice or all types actually is dropping, so the “value” of voice is a problem not only for fixed network providers, but also mobile service providers.

source: Ofsted

Some telcos offer discounts on internet access service if a voice line is purchased with that service. That often is the case in markets where retailers use wholesale access, for example, and the wholesaler requires that retailers buy voice service as a prerequisite for access to rights to buy broadband services.

source: Bloomberg, TIA

That seems not to square with other data, though, even if some forecasts of decline might have been too aggressive. A recent survey by Convergys found that only 36 percent of respondents buy fixed network voice service.

source: bankofamerica.com

Recent studies by the U.S. Centers for Disease Control have found households buying fixed network voice service represent about half of U.S. homes in 2014. By 2017, the percentage of mobile-only households had climbed to 51 percent, while homes buying fixed network voice represented about 46 percent of locations.

The government’s survey found that more than 70 percent of adults between 25 and 34 were mobile only, suggesting that in some demographics, fewer than 30 percent of households buy a fixed network telephone service.

In the developing world, most people already are mobile-only.

source: CDC

Voice Is Not Yet "Just a Feature," But it Now Drives Less Revenue

Even if “voice” is a vital feature of a mobile phone service, it is driving less revenue and profit for mobile and fixed network operators in the U.S. market. Still, despite declining demand, service providers are using bundling to sustain some amount of demand for a product that, as a standalone product, would arguably have far less demand.

Recent studies by the U.S. Centers for Disease Control have found households buying fixed network voice service represent about half of U.S. homes in 2014. By 2017, the percentage of mobile-only households had climbed to 51 percent, while homes buying fixed network voice represented about 46 percent of locations.

The government’s survey found that more than 70 percent of adults between 25 and 34 were mobile only, suggesting that in some demographics, fewer than 30 percent of households buy a fixed network telephone service.

Without triple play bundling, generally purchased by perhaps 30 percent to 37 percent of U.S. cable TV households, voice take rates would be even lower than they presently are.

Voice, for example, represented in 2015 something on the order of eight percent or so of Comcast’s service provider revenue. In the second quarter of 2017, voice represented about 6.5 percent of Comcast cable communications segment revenue. About 37 percent of Comcast consumer accounts bought a triple play, in the second quarter of 2017.

It is a reasonable bet that nearly all the voice accounts come from triple-play accounts.

Consider current pricing of mobile “voice and messaging” by some leading U.S. mobile operators, which tends to price unlimited domestic usage for voice and messaging at about $20 a month. By some estimates, fixed network voice represented $22 to $30 a month in revenue per line, half a decade ago.

The value of fixed voice arguably is less than that in 2017, but an attribution of $15 a month might be reasonable, in a fixed network context, if $20 is the retail value of a mobile voice-plus text-messaging capability, per line.

Though the value of triple play bundles long has been that it reduces account churn, in the current environment, the triple play also sustains demand for voice services that--absent the bundle--would be significantly lower.

Triple play bundles also increases profits, some studies find. In the U.S. market, single play accounts tend to run between 30 percent and 37 percent, as a rule. Bundles (dual play or triple play) represent up to 70 percent of accounts.

source: indiantelevision.com

Only 36% of U.S. Consumers Still Buy Landline Phone Service

Legacy technologies can remain in use for quite some time, as a Bank of America survey of U.S. consumers suggests. For communications service providers, the salient example is “landline” phone service, used by just 36 percent of those surveyed.

The very inclusion of landline voice service with outmoded platforms such as compact discs, physical calculators, VCRs and records indicates something about the likely future of landline voice services.

It would not be unrealistic to predict that, at some point, buying of such services--absent other bundling--would fall to low double digits. The countervailing trend is bundling, where consumers are offered discounts for buying phone service with video and internet access, “artificially” inflating demand for landline voice.

The survey, conducted by Convergys, included 1,000 respondents throughout the United States, of  adults 18 or older with a current banking relationship (checking or savings), and who own a smartphone.

source: bankofamerica.com

Winner Take All in Mobile Apps

Facebook and Google hold the top-six spots for usage among U.S. mobile users,  and eight of the top-10 slots. That matters because, in a winner take all market, only the few leading firms reap the returns.

U.S. consumers spend 90 percent  of their mobile app time in their top five apps, making up 51 percent of total digital time spent overall, comScore reports.

source: Business Insider

5G Might Generate $3.5 Trillion in 2035

In 2035, when 5G’s full economic benefit should be realized across the globe, a broad range of industries – from retail to education, transportation to entertainment, and everything in between – could produce up to $12.3 trillion worth of goods and services enabled by 5G, a study conducted by Berkeley Research Group forecasts. 

The 5G value chain itself is seen as generating up to $3.5 trillion in revenue in 2035, supporting as many as 22 million jobs. 

Over time, 5G will boost real global GDP growth by $3 trillion dollars cumulatively from 2020 to 2035, roughly the equivalent of adding an economy the size of India to the world in today’s dollars, the researchers predict.

Value Shifts in Auto Industry are an Opportunity for Telecom

Shifts of value within the ecosystem are happening in virtually every industry touched by the internet and software. In the telecom industry, value has shifted from “access and transport” to “applications.” That is happening in the automobile industry as well, with a difference. In the communications business, access providers struggle to maintain relevance.

In the automobile industry, as in other industries, access providers have a chance to gain relevance.

In the automobile industry, shared of ecosystem revenue are shifting from “vehicle sales” to applications and services. More important, shares of profit are shifting even faster, away from vehicle sales and aftermarket, and towards mobility and apps.

If you want to know why 5G matters, a chance to earn new revenues, from new customers, using new applications, is among the key reasons.

source: strategy&

source: strategy&

source: strategy&

5G Fixed Wireless Could Add $1.8 Billion in Consumer Segment Revenues

Even if service providers in most parts of the world will not see the opportunity in such terms, AT&T, Verizon and possibly other service providers see significant upside in fixed 5G deployments, for obvious reasons.

In the U.S. market, fiber to the home has remained a tough business case, given generally lower population densities across much of the United States, as well as the certainty that at least half the investment will be stranded, immediately. So 5G fixed wireless could allow AT&T and Verizon, for the first time, to supply gigabit per second internet access connections in many areas where the fiber-to-home business case has not worked.

Quantifying the potential upside is the issue. One way is to calculate the amount of account loss 5G fixed wireless could address.

In the second quarter of 2017,  U.S. telcos lost at least a net 233,260 internet access accounts, according to Leichtman Research Group. But most of those losses were from a few telcos other than AT&T and Verizon.

Between them, AT&T and Verizon lost only about 32,000 accounts in the second quarter of 2017. So a first-order impact of 5G fixed wireless would be a halt to those losses.  

If AT&T and Verizon merely halted 75 percent of those fixed network internet access account losses, that would represent annual gains of about 96,000 accounts.

Assuming those saved accounts represent monthly gigabit access revenue of $70, each such account represents $840 in annual revenue, or about $80.6 million in revenue.

If AT&T and Verizon were able to erase all the losses, that implies revenue upside of nearly $107 million, from avoided losses of 128,000 accounts.

If AT&T and Verizon did better, and actually gained 231,000 net new accounts (splitting those gains with cable TV operators), the annual revenue impact would be about 359,000 net new accounts.

That might represent $301 million in net new revenue, plus avoided losses of $80.6 million, for a total revenue swing of about $408 million, incrementally.

But that is not the biggest impact.

Considering only AT&T, which had in the second quarter about 15.7 million internet access accounts in service, what is the impact of being able to provide gigabit internet access using 5G fixed wireless?

Assume four million AT&T customers still are on all-copper access lines. Assume half those lines can be upgraded using 5G fixed access in the relatively near term, and that half those locations decide to upgrade to 5G fixed wireless.

That could mean two million additional passing, and perhaps a million additional accounts. At $70 a month, that implies additional upside of about $840 million for AT&T.

So internet access upside could amount to perhaps $1.24 billion annually.

For AT&T, which has a consumer internet access business generating a bit under $2 billion per quarter, $7.6 billion annually, those gains could amount to a boost of about 62 percent. That is huge.

But there is more. Once gigabit access is available, linear and on-demand TV services can be sold to the accounts. Assume a net gain of about 1.2 million accounts because of 5G fixed wireless, in the near term.

Assume half those customers buy a linear video service. That is an incremental 600,000 accounts. At $80 a month ($960 per year), that adds perhaps $576,000 in incremental video revenue.

That implies perhaps $1.8 billion in incremental new revenue generated by 5G fixed wireless, for AT&T alone.

AT&T Expands 5G Fixed Wireless Trials

AT&T expects standards-based deployment of fixed 5G as early as late 2018.

AT&T is expanding its fixed wireless 5G trials to business and residential customers in Waco, Texas; Kalamazoo, Michigan; and South Bend, Indiana by the end of 2017, after tests launched in Austin in June 2017.

In tests so far, AT&T has seen speeds up to 1 Gigabit per second and latency rates well under 10 milliseconds for the radio link at customer trial locations in Austin.

AT&T expects commercial equipment to be available within six months of the completion of the 5G Release 15 standard. In contrast, LTE equipment wasn’t available for a year to 18 months after the LTE standard was complete, says AT&T.

In 5G Evolution metros AT&T has upgraded cell towers with network upgrades that include LTE Advanced technologies like 256 QAM, 4x4 MIMO, and three-way carrier aggregation.

By the end of 2017, AT&T expects to deploy LTE-License Assisted Access and four-way carrier aggregation in certain areas of 5G Evolution metros.

AT&T recently tested LTE-LAA technology in San Francisco where peak speeds of more than 750 Mbps were obtained.