What Eventually Takes the Place of Mobile Revenues?

As a rule, I expect that any given communications service provider will have to replace half of current revenue about every decade. Among the best examples (because we have the data) is the change in composition of U.S. telecom revenues between 1997 and 2007.

Back in 1997, nearly half of total revenue was earned from “toll” services (long distance, including international and domestic long distance voice. Profits also were disproportionately driven by long distance services.

A decade later, toll service had dropped to 18 percent of total revenue, while mobile services had risen to about half of total revenues, up from about 16 percent of total.

source: The Economist

A similar trend can be noted for European Union mobile revenues between 2010 and 2018, a period of less than a decade, but still a time when voice revenue dropped from about 80 billion euros to about 45 billion euros, while messaging dropped from about 19 billion euros to perhaps 10 billion euros and mobile internet access grew from about 18 billion euros to perhaps 42 billion euros.

source: FCC

There is some good evidence that computing industry suppliers must replace half of current revenues every 10 years. That is true for chip maker revenues as for computing services providers.

That pattern is clear in telecommunications as well. Messaging revenues provide a good example. Voice revenues provided an earlier example.

source: Chetan Sharma    

Mobile services have been the industry driver for most of the past couple of decades, but new sources still must be found.

The cable TV industry likewise has had to replace about half its revenue over a decade.

Similar trends can be seen at AT&T, where mobile revenues replaced fixed revenues as the big driver of overall results.

source: Deloitte

How Much Net New 5G Revenue Should We Expect?

Service provider revenues from 5G connections will approach $300 billion by 2025, rising from $894 million in 2019, a new study from Juniper Research predicts. That also implies a growth rate of about 163 percent over the first six years.  

If correct, then 5G service revenues would reach 38 percent of total operator billed revenues by 2025.

It always is difficult, though, to make sense of such forecasts, in large part because revenue earned by the next generation platform tends to displace revenue earned from existing platform. In other words, most 5G revenues will cannibalize 4G accounts.

There should be some incremental revenue upside, if 4G provides a template. In other words, it is likely that new 5G services will be sold at some price premium to 4G. In some cases that will be driven by higher prices for mobile 5G. In other cases, higher revenue will come from fixed 5G, which will be prices comparably with fixed internet access services. That could mean per-account revenue that is higher than mobile accounts generally produce.

source: GSMA

In 2025, the 1.5 billion 5G connections will be 14 percent of total cellular connections in the same year, Juniper Research suggests.

Some of us would argue that incremental revenue will be driven by fixed wireless and then internet of things applications. Aggregate 5G revenue figures do not matter as much as the revenue produced by the new services.

For most consumer users, the primary benefit of 5G deployment is going to be that 4G gets more attractive. Very few consumer users will benefit from the ultra-low-latency features of standards-based 5G, and while the headline speeds for mobile 5G will have the same marketing value as gigabit fixed network internet access, virtually no consumer apps require that much speed.

We might find that most consumers are mostly content to rely on advanced 4G for quite some time. If today’s “typical” LTE access speed ranges between 11 Mbps to 14 Mbps, then typical LTE-A might range between 30 Mbps and 40 Mbps.

For any single phone, that is likely to be enough to handle any application a typical person wants to use. So much might depend on what percentage of 5G revenues are driven by new use cases, rather than consumer mobile broadband.

After 50 Years of Shrinking Roles, Telcos Try to Grow

After 50 years of shrinking roles in the communications ecosystem, major service providers seek to create new roles offering higher revenues, greater profits and diversified revenue streams, as once was the case.

That does not mean firms want to recreate roles in most of the former areas, such as becoming manufacturers of network infrastructure or end user devices. But firms now seek roles beyond connectivity.

Firms whose roles were legally prohibited, curtailed or opened to competition, are trying to find additional and profitable roles in many parts of the ecosystem that were curtailed or forbidden by the deregulation process of the 1980s and earlier.

Though it now seems “natural,” virtually all the businesses now associated with private networks, end user equipment and software, consumer and business applications, Wi-Fi and other local area networks have been created only as the end of monopoly phone service era began.

Apple’s device business, the Android ecosystem, Wi-Fi ecosystem, local area networks, cable and satellite TV, the phone interconnect and computing system integration and value-added reseller businesses all exist because the public network was deemed to end at a demarcation point on every customer’s premises.

Though in a regulatory sense the rise of Facebook, Google, Amazon and all other app providers (edge providers) was not enabled by telecom deregulation, they were enabled by legal frameworks that left computing services completely unregulated.

To understand why many firms work to create new roles for themselves, consider that, in the monopoly era, AT&T supplied not only connectivity services, but also the network’s equipment and software; the customer equipment (phones) and owned the inside wiring as well as the rest of the network.

In a revenue sense, AT&T made money building and selling infrastructure (as Nokia, Ericsson and others now do); building and selling the CPE (as Apple, Samsung and others now do) and providing all the connectivity (instead of retaining only a fraction of such revenues).

These days, service providers mostly must rely on connectivity revenues alone, in competitive markets, to generate revenue.

So one way to look at efforts to create additional roles in mobile banking; entertainment services; applications and computing is to understand them as ways of recreating the once more-robust involvement in greater portions of the communications ecosystem.

It is not exactly “back to the future,” but it is close.

Historically, only the public network existed. When U.S. consumers or businesses purchased a phone service, the wiring inside the home and the phones were owned by the telco.

That began to change in 1968, when in the Carterphone decision, people gained the right to use their own equipment on the AT&T network.  

With the breakup of the Bell system in 1984, inside wiring became the property of the building or homeowner. That, in turn, lead to the creation of  private networks (local area networks, for example).

The in-building or campus communication systems, equipment and software became the province of private networks. Where in the monopoly era, all customer premises equipment was produced and owned by AT&T itself, today all sorts of companies produce CPE, and AT&T has gotten out of the business of building either network infrastructure products or CPE.

Ironically, the strategic imperative many telcos embrace is an effort to recreate the “multiple roles in the ecosystem” position they once had in the monopoly era.

Why 5G Capex Has to be Contained

It is reasonable to expect some uptick in mobile service provider capital investment as suppliers begin building 5G networks. It is, despite worries to the contrary, unlikely that the increased capital investment will require a doubling, tripling or some other huge increase in spending , as some have feared.

In fact, Three UK and Swisscom executives now say 5G investment will be “flat,” in relationship to existing levels.  

Credit open source, Moore’s Law, facilities reuse, spectrum aggregation, new spectrum, unlicensed spectrum, small cells, virtualization, software defined networks and use of commodity servers as innovations that actually reduce capex requirements, even as performance is boosted.

In other words, the amount of capital required to build new networks often is less than using legacy platforms and technology.

The other big constraint is that returns on deploying capital are less than in past years. Put simply, investing a unit of capability produces revenue at a fraction of that investment. In recent years, in every geography, there is about an order of magnitude less revenue produced for each unit of capex deployed.

That creates huge pressures on service providers to better match investments with investment return. That is one good reason why 5G capex might be far more restrained than many expect.

source: Subex

The new 5G networks must be built, of course. But how they are built, when and where, will be more strategic than in the case of past networks, one might argue. The reason is simply that the business model might be far more challenging than in the past.

So capex will have to be scaled to match expected financial return. And that will put constraints on the amount of investment.

Indoor Space Business Models Could Change in 5G Era

Indoor space has been a big coverage issue for mobile operators, and has created space for Wi-Fi to become a key part of access infrastructure. But indoor space might create new business opportunities in the 5G era, when indoor coverage options increase and change.

Incentives for switching access to Wi-Fi might change for reasons beyond faster speed and cost savings. For the first time, some users might prefer to stay on the mobile network because their virtual network features and privileges are lost when switching to Wi-Fi.

Also, the ability to bond mobile and Wi-Fi spectrum seamlessly will provide additional incentives to simply remain connected to the mobile network when indoors, assuming indoor coverage is sufficient to maintain the mobile signaling network connection.

Indeed, some argue 5G will start to shift access back towards mobile networks. In the 3G era, users switched to Wi-Fi at times because it did not apply against their usage allowances, and in part because Wi-Fi tended to offer faster access than did the 3G network.

That changed in the 4G era, when Wi-Fi generally became slower than the mobile network.

In the 5G era, there is likely to be more use of the mobile network, in part because of spectrum aggregation. Tariffs and usage allowances also will make a difference.

In the 5G era, it is conceivable that Wi-Fi offload will happen less than it did in the 3G and 4G eras.

source: Cisco  

That might be aided by a number of other changes, beyond 5G usage allowances and tariffs. Indoor coverage by small cell might include access to virtual networks that offer consumers of business users network features not available on the Wi-Fi network, and enabled by network slicing, for example.

If, for example, network slicing is used to create differentiated speed tiers (gold, silver, bronze) plans, mobile customers will lose the advantage of their premium plans when switching to Wi-Fi.

If one assumes outdoor space will be the place where mobile coverage is most valuable, indoor space will remain a more-contested arena where access options will be more diverse, where third parties will have a greater role, where the ability to support private network features at the indoor edge will open up new possibilities for end users, mobile operators and third parties.

Does Broadband Increase Home Values?

There is an apparently-direct correlation between use of broadband internet access services and the general level of economic development in any country.

source: Springer.com

In other words, household income and use of higher-speed internet access is directly correlated.

source: Brookings

So it is perhaps not unusual that some try and establish a causal relationship between deployment of broadband facilities and economic growth, home prices or income.

Some believe that access to a fiber-to-home internet access connection can increase home value as much as three percent.

The Fiber Broadband Association also claims gross domestic product is higher where gigabit internet access is available.

Likewise, the association claims that optical fiber access increases the value of multiple dwelling units.

Most would likely agree that a correlation between home prices, economic health and internet access is logical. Perhaps few of us really believe internet access “causes” either higher home prices or economic growth. In fact, it might be more logical to argue that areas with h stronger economic growth drive job growth and average wages, which in turn drive higher average household incomes; higher discretionary income and therefore higher demand for gigabit and higher-speed internet access.

In other words, correlation is not causation. And if there is causation, wealthier consumers may drive demand for more-expensive internet access. That, in fact, is precisely the model Google Fiber, AT&T and many independent internet service providers have done, when marketing.

ISPs deploying gigabit access have deliberately selected wealthier neighborhoods, where demand is strongest.

To be sure, virtually nobody would discount the value of high-quality broadband access, anymore than observers would question the value of wastewater, clean water, electrical services, roads, airports or railways.

What is not clear is a causal relationship between utility, transportation and communication services and economic growth, housing prices, average wages or job creation. “Necessary but not sufficient” is a reasonable assumption.

source: Blandin Foundation

Ofcom Ponders Greater Duct Access for BT Competitors

Optical access at today’s Ethernet speeds remains quite expensive, an analysis by Ofcom has found. At current tariffs, any gigabit connection over an optical fiber drop generates, over three years,  no net revenue at a distance of 80 meters, and actually loses money at distances up to 100 meters, if any supplier has to install new ducts.

All those connections are profitable over three years when existing ducts can be used. And that is why Ofcom is considering liberalizing duct access further than is possible today.  

source: Ofcom

Common Carrier Regulation MIght Have Produced $24 Billion to $30 Billion in Lost Investment

With the caveat that in many ways lower capital investment in communications networks sometimes can be viewed as a positive, utility regulation of internet access had a negative $10 billion to $13 billion impact on capital investment by U.S. internet service providers, according to Dr. George Ford, Phoenix Center for Advanced Legal and Economic Public Policy Analysis chief economist.

“I find that while the decline in capital spending rose in 2015 and 2016 stopped in 2017, investment in the telecommunications sector is materially compressed, being about $10-to-$13 billion (or 12-to-15 percent) below expectations,” says Ford.

source: Phoenix Center

Since 2015, some $24-to-$30 billion in investment has been lost because of Title II regulation, Ford argues.

“Capital spending is a cost, not a benefit,” Ford says. The point is that “higher capex” is not important in and of itself, but only as it delivers consumer benefits. “If the same level of benefits could be obtained at a lower level of capital spending, then society would be better off,” Ford notes.

That might well be the case in coming years, in part because 5G might be able to supply end user benefits at lower costs than fixed networks. Others might point out that increasing use of open source technology, unlicensed or shared spectrum, spectrum aggregation and other tools might also help moderate capital investment requirements.

“Analysis of recent capital spending trends suggests many of the larger providers of broadband services— including AT&T, Comcast and Charter—are not spending as much as expected in 2018, and Verizon has indicated it will materially reduce capital spending for 2018 and 2019,” Ford notes.

The main point is that internet service provider capital investment during the 2015 to 2017 period of common carrier regulation reduced capital investment by $24 billion to $30 billion. Continued uncertainty about a possible return of such regulation might also be depressing investment n 2018, Ford suggests.

All Technology Might Require Trade-Offs and Prudent Usage

Mobile phone use and Wi-Fi can have health effects, some studies have found. Such studies have been conducted on many types of non-ionizing radiation, for decades.

Non-ionizing radiation includes exposures such as electromagnetic fields (EMF) produced by power lines, radio frequency energy used in microwave ovens or emitted by cell phones, and solar ultraviolet radiation. Whether such exposure is dangerous, or not, has been argued for decades.

Prudent usage is the advice sometimes given for using any products that product non-ionizing radiation.  

Some have argued such potential effects are reasons for not deploying new mobile networks. Others have argued users simply have to be conscious of potential risks and adjust usage accordingly.

As with nearly all technologies, risks and rewards have to be balanced. There are some risks associated with automobiles and airplane travel, for example, and most us can balance the risk of using or not using those technologies.

Flying in an airplane does expose passengers and crew to more solar radiation than is experienced at ground level. So people have to balance such risks with the benefits of flying.

That is not a bad way to balance other risks as well. Be prudent.

Are IoT Subscriptions the Upside from 5G?

“If you don’t believe in IoT growth, there’s no point in investing in 5G,” Hatem Zeine

Founder and CTO of Ossia has said.

Perhaps the biggest opportunity for communications service providers in the 5G era is internet of things services beyond connectivity. Though it will be far from easy, the trick is to take valuable and essential solutions that might formerly have been sold as “products” and turn them into subscriptions.

Of course the value will continue to be “outcomes” of value to buyers: lower cost, higher output, less waste, higher product value, faster time to market, higher revenue or higher profits.

The point is that the business upside from IoT is not sensors or even insights gleaned from sensor data. The value comes from ability to change business processes in ways that cut costs or boost revenues and profits. And that means participation in IoT subscription services.

Many observers say subscriptions are the new growth frontier for many, if not most, products.

Turning products into subscriptions (everything as a service) is a big business shift many believe is irresistible. Automating the process of buying staple products or discretionary products Is a way to lock in repeat business. And some would note that 41 percent of all consumer purchasing is repeat business.

Of course, telecom has always been sold as a subscription, which does raise questions about how relevant that “everything as a service” trend might be, and where there are additional opportunities for communications service providers.

In most cases, the answer is that service providers win by offering more subscription products as part of their core offerings. Mobile video services provider a good example. The innovation is not the “subscription” revenue model; that is the legacy format, after all.

Instead, what is new is participation in the new business as a distribution channel.

Communications providers have some experience with turning products into services. Hosted business voice (hosted IP PBX or hosted IP telephony) provides a recent example, where a recurring subscription replaces a customer’s need to own and manage a business phone system.

Smartphones often are functionally subscriptions, not “products.” Even if consumers actually buy their devices, they often do so as two-year payment plans. And as support for many devices now routinely lasts for only three years, for many consumers “ownership” of a smartphone resembles a “phone subscription.”

By some estimates there are at least 2,000 subscription-based consumer product businesses in operation, selling food (Blue Apron and HelloFresh), grooming products (Dollar Shave Club and Harry’s), beauty supplies (Birchbox and Ipsy), and clothes (Stitch Fix and Trunk Club).

In principle, the substitution of “hosted PBX” or “business phone functions as a service.” Historically, telecom companies sold such services as “Centrex.” These days, both incumbent telcos and third parties sell “business phone functions as a service.”

U.S. Consumers View "Choice" in New Ways

Ever since the advent of satellite-delivered programming, choice has been the core value linear video subscriptions have offered. But value now has become an equally-big issue.

Some 90 percent of U.S. residents polled by Morning Consult say that the most important factor when deciding to subscribe to a TV or streaming service is cost.

Some 56 percent say cable TV is "unaffordable" and 47 percent say the same about satellite, while just 17 percent deem streaming unaffordable.

But the real issue is value. Those same respondents also say they object to paying for channels they do not watch, and prefer to buy only channels they actually watch. On the other hand, consumers also say they value services with quantity and quality of shows.

source: Morning Consult

So “choice” has a new meaning. Choice once meant having scores to hundreds of programming choices, not three broadcast TV stations. Increasingly, choice now means “paying only for what I choose to watch.”

Where the traditional maxim has been “I want what I want, when I want it,” the new mantra might be “I want only what I want, when I want it.”

source: Morning Consult

source: Morning Consult