Without Subsidies, Tough or No Business Model for Internet Access in Rural Areas

It often is easy to forget the low density of most places in the United States, defined as places where there are fewer than 15 locations (business and residential) per road mile, according to Steve Parsons, Parsons Applied Economics president and James Stegeman, CostQuest Associates president.

Such places cover nearly 86 percent of the area of the lower 48 U.S. states and most of Alaska. Those 86 percent of areas contain 12 percent of U.S. locations.

source: CostQuest Associates

The implications for building any sort of cabled communications network are stark. In such areas it can cost $17,400 per location to build a cabled communications network using standard telecom industry platforms.

If half the locations actually buy service, the network cost per customer is as much as $34,800.

Beyond the capital investment are the ongoing costs to operate the business. The bottom line is that, in rural areas, there is no sustainable business case without subsidies.

Capital investment per customer location, for conduit and poles, is approximately 5.6 times higher in rural areas as in suburban areas, the consultants say. For fiber optic cable, the capital investment is approximately 4.2 times higher in rural areas as in suburban areas.                                 

source: CostQuest Associates

The other issue is that across the U.S. west, there are many areas that are not populated (shown in grey). Areas shown in green (metro areas) are where terrestrial cabled networks have the lowest costs. Areas in yellow are medium cost, while areas shown in orange have high costs. Areas in red have very high cost.

source: CostQuest Associates

Such realities are why TV white spaces, unlicensed and shared spectrum, low earth orbit satellite constellations and 5G are viewed as possible solutions for rural internet access and other services.   

There are, of course, possible business implications for existing service providers (cable, telco, satellite, fixed wireless) in rural areas.

$773 Billion in 2018 IoT Spending on Hardware, Software, Services

Global spending on Internet of Things sensors, software and services will reach $772.5 billion in 2018, an increase of 14.6 percent over the $674 billion that will be spent in 2017, Gartner predicts.

IoT hardware will be the largest technology category in 2018 with $239 billion going largely toward modules and sensors along with some spending on infrastructure and security.

Software will be the fastest growing technology segment with a five-year CAGR of 16.1 percent. Services spending will also grow at a faster rate than overall spending with a CAGR of 15.1 percent and will nearly equal hardware spending by the end of the forecast.

"By 2021, more than 55 percent of spending on IoT projects will be for software and services,” said Carrie MacGillivray, IDC VP.

Global IoT spending will grow at a 14.4 percent compound annual growth rate through 2021, Gartner predicts.

Asia/Pacific (excluding Japan) will be the geographic region with the most IoT spending in 2018 ($312 billion) followed by North America (the United States and Canada) at $203 billion and Europe, the Middle East, and Africa (EMEA) at $171 billion.

China will be the country with the largest IoT spending total in 2018 ($209 billion), driven by investments from manufacturing, utilities, and government.

IoT spending in the United States will total $194 billion in 2018, led by manufacturing, transportation, and the consumer segment.

Japan ($68 billion) and Korea ($29 billion) will be the third and fourth largest countries in 2018, with IoT spending largely driven by the manufacturing industry.

Latin America will deliver the fastest overall growth in IoT spending with a five-year CAGR of 28.3 percent.

source: IDC

The industries that are expected to spend the most on IoT solutions in 2018 are manufacturing ($189 billion), transportation ($85 billion), and utilities ($73 billion). IoT spending among manufacturers will be largely focused on solutions that support manufacturing operations and production asset management, IDC said.

In transportation, two thirds of IoT spending will go toward freight monitoring, followed by fleet management. IoT spending in the utilities industry will be dominated by smart grids for electricity, gas, and water.

Cross-Industry IoT spending, which represent use cases common to all industries, such as connected vehicles and smart buildings, will be nearly $92 billion in 2018 and rank among the top areas of spending.

Consumer IoT spending will reach $62 billion in 2018, making it the fourth largest industry segment. The leading consumer use cases will be related to the smart home, including home automation, security, and smart appliances.

U.S. SD-WAN Managed Service Revenue $282 Million in 2018

U.S. managed SD-WAN revenue will reach $282 million in 2018, according to Vertical Systems Group. The big takeaway is not the present volume of service provider sales, but the projected growth of SD-WAN as a replacement for legacy wide area networking choices.

In principle, SD-WAN services could take a growing share of MPLS and other networking services.

Service providers actively selling Managed SD-WAN services in the U.S. include Aryaka, AT&T, CenturyLink, Cogent, Comcast, Fusion Connect, GTT, Hughes, Masergy, MetTel, Sprint, Verizon, Windstream and Zayo.

Other network operators throughout the world offer or plan to offer Managed SD-WAN Services in the U.S. market, Vertical Systems says.

source: Cisco

AWS Launches Edge Computing Service

Mobile and fixed network connectivity service providers believe edge computing is an opportunity for them to leverage their real estate and connectivity assets.

But it was only a matter of time before today’s cloud computing giants began to show their migration path to edge computing. AWS seems to have gotten there first.

source: Market and Markets

AWS Outposts enables native AWS services, infrastructure, and operating models at “virtually any data center, co-location space, or on-premises facility,” AWS says. “You can use the same APIs, the same tools, the same hardware, and the same functionality across on-premises and the cloud to deliver a truly consistent hybrid experience.”

source: AWS  

The obvious applications are enterprise-driven use cases where low latency is a paramount concern, or where local data processing is essential for the use case. Industrial internet of things, high-definition video or security, for example.

AWS Outposts come in two variants, the first being VMware Cloud on AWS Outposts, which  allows customers to use the existing VMware control plane and application programming interfaces.

The AWS-native variant of AWS Outposts allows customers to use the same APIs and control plane used to run in the AWS cloud, but on-premises.

AWS Outposts infrastructure is fully managed, maintained, and supported by AWS to deliver access to the latest AWS services, the company says.

Mobile, Internet, P2P Apps and Elderly Care

“Aging in place,” allowing the elderly to remain in their homes even after they require caregivers, could well reduce the cost of living at home, compared to care in an assisted-living situation.

At least according to one study, mobile, peer-to-peer and other apps can allow the elderly to remain in their homes, saving more than half the amount required to live in an assisted living home.

That speaks to the value of mobile and internet apps, if not directly to the business opportunities available to connectivity suppliers.

source: National Institutes of Health

Disposable Income is the Great Constraint on Telecom Revenue Growth

Australian households spend about 3.5 percent of disposable income on fixed and mobile communications services, which points to a major constraint on the connectivity services business: consumers will only spend so much on communications services.

As a percentage of total household income, households spend perhaps 2.5 percent of what they earn on communications, assuming discretionary income is 70 percent of total income.

Even if mobile subscription growth globally has achieved what once seemed nearly impossible when the only tools we had were fixed networks, long term, telecom industry revenue itself only tends to grow in line with growth of gross national income.

And that means telecom really is a slow-growth industry, not a growth segment of the economy. That also means industry profitability sits on a bit of a knife edge, under conditions where every legacy service is declining, and where substitute products  increasingly are available to businesses and consumers.

In the global wide area network segment of the business, for example, enterprises now directly own and operate their own private WANs, carrying a huge share of global traffic. Depending on route, private networks now carry between 20 percent to 70 percent of all traffic on global wide area network routes.

source: TeleGeography

One way of describing that reality is that a business once monopolized by telecom carriers now is driven and lead by enterprises that build and operate their own networks. In that sense, in the global capacity business, relegation to “dumb pipe” status is only the second-biggest business problem service providers now face.

It is the fact that big enterprises can build and operate their own networks, removing most of the potential demand from the market, that is the number-one trend.

Likewise, consumers and households are only going to spend so much of their own incomes on communication or entertainment services, no matter how good.

According to the Australian  Bureau of Communications and Arts Research, household spend on mobile and fixed network communications runs about 3.5 percent of of disposable income.

source: Australia Department of Communications and the Arts

Of course, all other things are not equal. There is more growth lying ahead in Africa and Asia than in North America and Europe, for example. Eventually, as markets saturate, the correlation with GDP becomes more pronounced.

source: IDATE

Correlation Between GDP and Telecom Revenue Growth is Problematic

Since telecom industry revenue is fairly directly linked to gross domestic product, over the long term, telecom service provider connectivity revenues will be closely linked to growth of GDP, all other things being equal.

Of course, all other things are not equal. There is more growth lying ahead in Africa and Asia than in North America and Europe, for example. Eventually, as markets saturate, the correlation with GDP becomes more pronounced.

Were the industry stable, single-digit revenue growth might not be such an issue. In an environment where product substitution is high and likely growing, and where end users increasingly are finding ways to remove demand from the public network services market, single-digit growth is a big challenge. 

It does not take much shift in demand to tip connectivity revenue to a negative growth profile.  In fact, flat revenue growth seems to be the global trend. 

source: IDATE

Data Cost Per Bit Implications

Data per bit has huge business model implications that will be more obvious in the 5G era. Consumption of video is the biggest new design issue for mobile networks, since video

is the app that requires the most capacity.

And it should be obvious by now that when access costs fall--either to a fixed price for unlimited usage, a fixed price for “what you typically use” levels, or even close to zero, as in the use of public Wi-Fi, behavior changes.

That was true for AOL when it switched from usage-based dial-up access to “unlimited” access, and is true in the era of public Wi-Fi as well. Big usage allowances mean consumers are willing to use Netflix and other streaming services. But, up to this point, such offers were hard to support on mobile networks, simply because cost per bit on most mobile networks has been an order of magnitude higher than on cabled networks.

But the principle remains: people consume more data, and especially video content, when they do not have to worry about the cost of doing so.

And that is why 5G will be revolutionary. It will, in a growing number of instances, break the traditional cost barrier that has prevented mobile access from becoming a full substitute for cabled (fixed) network internet access.

source: Nokia Bell Labs

Since video arguably is the app with the most-stringent revenue per bit profiles, especially when the internet access provider earns no direct revenue from enabling video access (ISP supplies access bandwidth and usage, but no direct video app revenue), the ability to supply lots of bandwidth for video is a prerequisite for any wireless access platform competing with cabled networks.

Voice and messaging arguably have the highest revenue per bit profiles (possibly as high as dollars per gigabyte) with web browsing somewhere in between (cents per gigabyte).

General purpose internet access arguably has the “best” combination of revenue and cost, though even there a cabled network might earn (retail prices) less than US$1 per gigabyte. Mobile bandwidth  generally costs $5 to $8 per per gigabyte (retail prices), lower than the $9 to $10 it cost in 2016 or so, for popular plans, and less than that for plans containing higher amounts of usage. Higher usage plans might feature costs per gigabyte closer to $3.

That is an internal business model issue for any mobile operator. But more than that is going to change in the 5G era.

source: Bell Labs

If you assume the mobile network cost of delivering a gigabyte will drop 50 percent or more from 4G to 5G, fueled by new spectrum, use of shared and unlicensed spectrum and small cells, then the cost of using a gigabyte of “mobile” access will be closer to the cost of using a gigabyte of “fixed” access, especially on an “actual consumption” basis.

And that is going to open up many new use cases where mobile is a substitute for fixed access. Customers who routinely work from multiple locations, especially on the go, might already find mobile is a functional substitute for fixed access. As prices continue to fall, a greater number of consumers will find their own use cases can be supported with with a fixed or mobile access plan.

If you assume mobile access costs, especially in fixed mode, reduce costs by up to an order of magnitude, then the wireless 5G option might well become a full functional substitute for a cabled network access service.

And that means, for the first time in industry history, that mobile or wireless platforms will be able to compete close to directly against fixed and cabled networks as suppliers of consumer internet access.

Long Distance Provides Example of What Will Happen with Subscription Video

What might happen with linear subscription video depends on the popularity of product substitutes and the degree of competition in the market, as was the case for U.S. long distance calling after the breakup of the Bell system in 1985.

Also, much depends on which the market positions of various providers. The history of long distance calling provides an instructive example. Though competition shifted shares of market for two decades, the arguably bigger change came in 2000, when demand for “long distance” was cannibalized sharply by mobile phone service.

source: Mackinac Center

For two decades, though average prices continued to decline, the big change was market share shift. Then, for two decades, the big change was product substitution.

The application to linear video is that competition has been shifting market share for a few decades (first from fixed to satellite; then cable to telco). What we should anticipate in the coming decade is a change of dynamic from market share shifts to product decline and substitution (decline of linear and replacement by streaming alternatives).

source: Department of Justice

The whole point of deregulation is to shift market share from incumbents to challengers. In the U.S. market, regulatory support meant that attackers (the Baby Bells) steadily gained share, while AT&T lost share, from 1985 to about 2000.

Sometimes, though, unforeseen consequences are encountered. Virtually nobody thought long distance would almost disappear, to be replaced by mobility as the industry profit driver.

The long slow decline, when incumbents such as AT&T simply sought to control the pace of decline while trying to create a different business model, held for quite some time. But then a quantum change happened, and the whole market virtually collapsed.

source: Technology Policy Institute

After 2000, all fixed network providers lost share, as demand shifted to mobility, largely because AT&T introduced its Digital One Rate plan, which made domestic long distance calling as affordable as local calling.

The point is that the speed of such changes depend on the degree of regulatory support for challengers; technology shifts and shifts of end user demand.

source: FCC

As applied to the video subscription business, we have reached the equivalent of the 2000 peak of long distance revenues, which implies a long process of declining revenues. Where efforts to gain or protect market share were paramount for a few decades, the new challenge is to create alternative products.

As mobile calling became the substitute for both long distance and local calling, so over-the-top streaming services are destined to replace linear subscription products. There is one crucial difference, however.

It was, relatively speaking, easy to create free and low-cost communication alternatives. Video entertainment has substantial “cost of goods” issues, however, in the form of expensive content rights. It might be true that “bits are bits” where it comes to communication services or apps.

It is never true in the video entertainment business, as content is highly differentiated, as well as expensive.

In the first nine months of 2018, some 23 percent of broadband households served by fixed network providers did not subscribe to a linear video service, according to S&P Global Kagan.

Over the first nine months of 2018, 2.8 million fewer linear video subscriptions were sold, with the biggest drops coming in the satellite segment of the distribution business.

source: UBS

By 2022, analysts at UBS predict, such streaming alternatives will represent 25 percent of all video subscriptions.

UBS projects there will be 9.2 million video streaming subscribers by the end of 2018.  UBS predicts there will be 24 million accounts by the end of 2022.

source: UBS  

The new issue is what products will emerge to replace linear video, including streaming services that are optimized for mobile delivery as well as fixed network versions.

SD-WAN Growth Rate 37%

SD-WAN traffic will grow at a CAGR of 37 percent compared to three percent for traditional MPLS-based WAN, Cisco predicts. As a result, SD-WANs will carry 29 percent of WAN traffic by 2022.

source: Cisco

CDNs Will Carry 72% of Total Internet Traffic by 2022

Content delivery networks (CDNs) will carry 72 percent of total Internet traffic by 2022, up from 56 percent in 2017, Cisco predicts. That is one indication of the importance edge computing is likely to assume, as most CDNs cache content at the edge of the wide area network.

The other clear trend is that private networks built and operated directly by enterprises such as Google, Amazon, Facebook, and Microsoft will carry a greater percentage of total traffic. In some ways, that trend mirrors the shift of retail applications (consumer and enterprise) away from connectivity providers to loosely-coupled, over the top apps.

At a high level, it can be said that more of the value of any communications-related application, service or process value is moving out of the “connectivity provider” realm. In other words, “becoming a dumb pipe” is but one impact of loosely-coupled app architecture. The other trend is that even the dumb pipe functions are taken directly by big app providers.

source: Cisco

One way of measuring the importance of edge computing is to look at the percentage of total network capacity (wide area, metro, region and metro) used to support internet traffic.

Metro capacity is growing faster than core-capacity and will account for 33 percent of total service provider network capacity by 2022, up from 27 percent in 2017.

source: Cisco

The obvious implication is that less data will cross WANs than otherwise would be required.

source: Wikibon

source: Wikibon