Consumer Connectivity Wallets are the Constraint on Revenue Growth

Some will lament the fact that even when gigabit (or any other very-fast) internet access service is available, most consumers do not seem to buy them, when there also are choices of other services that cost less, but are not as fast. In other words, there typically is some gap between the availability of a service and consumer willingness to buy.

In the United Kingdom, for example, 94 percent of U.K. homes and businesses are in areas where fixed network broadband operating at 30 Mbps or faster is available, according to Ofcom. In such areas, just 45 percent of homes buy a service operating at 30 Mbps or faster.

According to Ofcom, perhaps six percent of U.K., homes can buy a service operating at speeds in three or four digits (300 Mbps to 1,000 Mbps, for example). If take rates resemble those of the United States, single digits are the take rates where gigabit services are available.

And such data underscores an “iron law” of the consumer connectivity business. People are only going to spend so much for connectivity services.

Average monthly U.K. household spend on telecom services fell in 2017, down by one percent in real terms to £87, equivalent to 3.5 percent of total household spend, even as households were upgrading to faster fixed network services with higher recurring prices.

That is a typical spending pattern for consumers in developed markets. Australian consumers spend about 3.5 percent of disposable income on connectivity services, for example. That same pattern can be seen in entertainment spending as well: households will only spend so much on communications or entertainment.  

Wallets are only so big, and get bigger only about as fast as overall income increases.

Average monthly spend on communications services fell by 1.2 percent from £126.18 in 2016 to £124.62 in 2017, an annual decrease of £18.72 in real terms, Ofcom notes.

Average U.K. monthly household spend on mobile voice and data services has decreased by eight percent (£4.02) since 2012, to £45.99 per month in 2017, Ofcom says.

In contrast, average monthly spend on fixed voice and internet services increased by 14.3 percent over the same period to £41.13. This is largely because consumers have migrated to faster broadband services, which tend to be more expensive than standard broadband services.

Mobile voice and data spending fell by 98p (2.1 percent), Ofcom says.  

source: Ofcom

The number of landlines fell by one percent to 33.1 million as a result of businesses switching to mobile and VoIP-based voice services. The fall in business lines was partly offset by a one-percent increase in the number of residential landlines, attributed to growing fixed broadband take-up, as most households in the United KIngdom need to buy a landline service to use fixed broadband services.

The main casualty of growing smartphone take-up has been traditional messaging (i.e. SMS and MMS), as users switch to more feature-rich internet-based messaging services, such as WhatsApp and Facebook Messenger, and the messaging services offered on other social networking sites.

By 2017, average outgoing messages (including SMS and MMS) per mobile phone subscription had fallen to 82 per month, having peaked in 2012 at 162 per month. And while average outgoing mobile call volumes per subscription have risen since 2007, reaching 157 minutes per month in 2017, this was two minutes per month less than in 2016, Ofcom says.

Global Service Provider Revenue to Grow, Free Cash Flow to Shrink

There is modestly good news for global connectivity service providers on the revenue front, through 2022: revenue growth rates are going to tick up modestly. The bad news is that free cash flow is going to dip about two percent on higher capex and opex.

And while mobile internet access can be counted on to boost revenue in developing markets, developed markets will have to rely on revenues from new 5G use cases. So there is more risk in the latter; less risk in the former.

source: A.D. Little

According to a forecast by Arthur D. Little consultants, the North American, Latin American and Middle East and Africa regions will experience service provider revenue growth above global averages.

Global service provider revenue growth will average three percent per year from 2017 to 2022, a slight uptick from growth rates between 2014 and 2016.  

“In North America, we expect total revenue CAGR of 4.6 percent from 2017 to 2022,” A.D. Little says. Latin America will see 5.2 percent CAGR, while MEA will a 4.9 percent CAGR.

The revenue growth can be attributed primarily to increased high-speed wireless data coverage in emerging markets, higher revenue from fixed infrastructure required to support aggressive increases in data consumption and new use cases enabled by 5G deployments in more mature markets.

“New revenues from 5G are expected to arise from new B2B and B2B2X use cases, as significant incremental revenues are not immediately expected from consumer 5G services,” the consultants say.  

source: A.D. Little

The baseline forecast predicts global telecoms capex growing at a CAGR of seven percent from 2017 to 2022, a rate that is more than double the historical CAGR and also outpaces the forecast growth in global telecoms revenue for the same period.

As a result, free cash flow will dip about 1.7 percent

Vodafone Upgrades 1 Million Berlin Homes to Gigabit in 3 Months

Vodafone has upgraded--in just three months--one million Berlin households to gigabit internet access speeds. Already having upgraded six million German household passings, Vodafone expects to reach 11 million gigabit passings by the end of 2019 and more than 12 million households passed by 2021.

That the gigabit upgrade is happening so fast is testament to the use of hybrid fiber coax cable TV facilities, among whose advantages has been lower cost and faster upgrades than switching from copper telephone networks to fiber-to-home.

Liberty Global has estimated the cost to upgrade to gigabit speeds at about €20 ($22) per passing.

source: Vodafone

Ofcom Wants Customers to Get Best Price

Unless they work at it, most consumers are probably unaware whether they are getting the best deal on their mobile or fixed network services, when not under contract for those services.

That can result in an anomaly: the more-loyal customers pay more for the same services than new customers just acquired on promotions.

Ofcom notes that out-of-contract prices vary based on the type of products purchased.

Mobile phones and subscriber identity modules, as well as fixed network voice prices, can range from six percent (fixed network voice) to 27 percent lower when contracts have expired.

But costs for out-of-contract dual-play or triple-play services on fixed networks can range between 19 percent and 26 percent higher, Ofcom notes.

source: Ofcom

That is the backdrop for possible Ofcom action requiring that service providers notify customers when their contracts have ended, as well as notifying such customers of the best prices available for the types of service they already are buying.

In some other markets, the potential for overpayment has been largest in instances where mobile handset sales are bundled with service contracts, when those service contracts continue even after the handsets have been paid off.

That is less a problem in markets where most handset sales are separate from service charges, of course, and where device installment plans are separate from service plan contracts.

There also is more transparency, and greater freedom to choose, when no service contracts are a typical retail billing practice.

The Ofcom proceeding is just one more example of why average revenue per user or account keeps dropping in the connectivity business. In addition to government-mandated actions that reduce consumer prices,  competition and new technology, plus changes in end user demand, combine to push prices lower over time.

Eco-Friendly Buildings Make Indoor Communications Worse

A recent report by the Ireland Commission for Communications Regulation  finds that the use of modern building materials,windows, block materials and roofing can have an extraordinarily detrimental effect on the propagation of radio waves into buildings constructed using these materials, reducing indoor signal strength three to seven orders of magnitude (100 times to 1,000,000 times weaker signal).

The losses suffered by radio waves penetrating these materials is on the order of 20 decibels to 60 decibels.

The basic math is that a 3 dB reduction in signal is a loss of half. So 20 decibels of loss represents seven consecutive reductions of 50 percent. A loss of 60 dB is 20 consecutive reductions of half the signal strength.

source: ComReg

The problem is that  thermal insulation or windows with aluminium or metallic frames, designed to help reduce heat loss from inside, also reflect incoming radio signals.

That is why some believe new forms of supplying indoor mobile coverage are a significant business opportunity. The question is how big an opportunity  neutral host indoor communications might be, and for whom in the ecosystem.

That might be especially in settings where enterprises and organizations decide to replace Wi-Fi with 5G as the local area network platform.

Enterprises might well be able to use 5G as a replacement for Wi-Fi, argues Randall Stephenson, AT&T CEO. “5G will become the way businesses network,” he says. “Wi-Fi probably goes away.”

The old distinctions between indoor connectivity and public network services, blurred with the advent of mobility to an extent, are changing.

“We’re seeing a lot of demand from enterprise customers for blurring the line between what has historically been a wide area network, mobile, with a local area network, which has traditionally been wired,” said John Donovan, AT&T Communications CEO. Private 5G and 4G networks, indoor small cells and 5G network features all are combining to create new possibilities.

Industrial internet of things networks on the factory floor might well use private 5G instead of Wi-Fi. In other cases 5G small cells might be operated by integrators or public networks.

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.

AT&T FTTH to Pass 14 Million Homes by End of 2019

AT&T says it will have connected 14 million U.S. homes with fiber-to-home facilities by the end of 2019.  If AT&T passes a total of 62 million homes, that implies FTTH will be about 23 percent of total passings.

You might wonder why AT&T apparently has been so slow to upgrade, given recent evidence that, where it chooses to build optical fiber access facilities, it can get 50-percent take rates, as well as higher dual-play revenues (video entertainment plus internet access).

But AT&T is opportunistic about FTTH for good reasons: the upside is not as great as you might think. Look at cash flow.

The mobility business unit represents about 50 percent of AT&T’s adjusted cash flow (EBITDA).

WarnerMedia represents about 17 percent of the company’s revenue and adjusted EBITDA. Business Wireline represents about 17 percent of the company’s adjusted EBITDA, while the Entertainment Group (consumer fixed network internet access, voice and entertainment video) represents about 15 percent of the company’s adjusted EBITDA.

In other words, less than 15 percent of AT&T revenue comes from sources other than the consumer fixed network, since the DirecTV service mostly uses satellite delivery. Also, keep in mind that DirecTV, for the moment, is delivered primarily by satellite, and likely represents $8.5 billion in revenue. So it is possible that consumer landline services now contribute only about seven percent of AT&T revenue.

In terms of revenues, mobility represents 40 percent, the entertainment group 26 percent and  business wireline about 15 percent of total quarterly revenue of $45.7 billion.

But what might really stand out is the 15 percent contribution from AT&T’s landline voice, video distribution and internet access products (the triple play suite). These days, consumer internet access, voice and entertainment video (recall that AT&T is the largest U.S. subscription video provider), contribute relatively small amounts of cash flow.

On the other hand, as DirecTV shifts to over-the-top streaming delivery, the quality of access network speeds should become more important. Still, it is an exquisite balancing act, as gross revenue for the streaming services is going to be less than AT&T earns from the linear DirecTV service.

In UK, BT has the Market Share, Cable has the Speed

BT might only have about 30 percent market share of the UK fixed network internet access market, but it has about 80 percent share of that market when considering both retail and wholesale market share. In other words, 80 percent of all fixed network internet access connections rely on BT’s network.

source: Morningstar

And though the whole point of the wholesale regime is to promote competition through use of a single access network, Morningstar analysts say that in the fixed networks segment of the communications business, “competition is increasingly between telecom companies and cable-TV operators.”

source: Ofcom

In principle, once Virgin Media completes its Project Lightning network upgrade, Virgin Media will be able to sell services to about 70 percent of UK homes. As has been the case, that likely will mean that Virgin Media begins to grab more of the share of demand by consumers for the fastest access speeds.

source: Virgin Media

source: Ofcom

In the U.S. market, cable operators have had the fastest speeds in the fixed network market since at least 2004.  

Australian Regulators Question Mobile Market Consolidation, Possible Impact of 5G

Mobile market consolidation from four to three now is an issue in Australia. At least partly at issue is whether the combination is a vertical merger between companies that operate in different parts of the communications business, or a horizontal merger that combines firms in the same lines of business.

But regulators also are signaling they might consider the merger in the context of converged networks combining fixed and mobile elements, something rather new in such competitive evaluations.

Also, the change in markets potentially caused by 5G seems a clear issue as well, as the ACCC believes 5G has potential to create a single functional market where traditionally there have been two.

The Australian Competition and Consumer Commission says the proposed merger of Vodafone and TPG will lessen competition, as it will remove a competitor from the mobile market and because Vodafone might be removed as a competitor in the fixed services market.

“A mobile market with three major players rather than four is likely to lead to higher prices and less innovative plans for mobile customers,” said ACCC Chairman Rod Sims. “Our preliminary view is that TPG is currently on track to become the fourth mobile network operator in Australia, and as such it’s likely to be an aggressive competitor.”

“Although Vodafone is currently a relatively minor player in fixed broadband, we consider it may become an increasingly effective competitor because of its high level of brand recognition and existing retail mobile customer base,” said Sims.

TPG has approximately 1.9 million retail fixed broadband subscribers and  421,000 mobile subscribers.

Vodafone is the number-three mobiler service provider and owns a network approximately half the size of Optus (number two by market share) and one quarter that of Telstra, the mobile market leader.

“In summary, the ACCC is concerned that the removal of TPG as a significant competitor for mobile services will result in higher prices and lower quality for retail mobile services,” the ACCC says.

Will 5G, Network Slicing Help Create New Services?

One can hope that 5G, network slicing and private 5G bring new opportunities to create and sell services that are not based simply on usage or best effort speeds; that are 

Video Streaming Increases Content Fragmentation

In the streaming era, ability to offer unique content, and lots of new content, has emerged as a strategic advantage. And that has lead to a new emphasis on production of new and unique content.

About $43 billion is spent every year by Disney and Comcast to create new content. Altogether, some $116 billion is spent to produce new video content in the United States each year, according to Ampere Analysis.

Such spending on unique content matters now that Netflix has dramatically changed the economics of the content business.

For decades, virtually all suppliers of linear subscription video services offered the same fare: a big bundle of channels. Differences were at the margins, namely the specific mix of channels offered to customers on each tier of service.

In the video streaming business, content exclusivity is the norm. And that emphasis on unique content is going to increase in the future.

source: Reelgood.com, Business Insider

The same pattern holds for TV series content. There is some overlap of programs, but most of the video is unique to Netflix, Amazon Prime or Hulu, for example.

Netflix spent about $13 billion in 2018, about 85 percent devoted to creation of new series and original content. By way of comparison, all “Hollywood” investment in new movies might be about $10 billion in 2018.

source: Ampere Analysis

Eventually, consumers faced with a huge palette of streaming services with mostly-unique content are going to be buying multiple subscriptions to assemble the mix of content they prefer. So aggregation services are sure to arise. Ironically, increasing fragmentation is also likely to increase the perceived value of traditional big bundles, if providers of those services can win rights to offer much of their content in both linear and on-demand fashion.

Internet Access Speeds Increase 36% in One Year

Fixed broadband speeds in the United States are rapidly increasing, according to Ookla. Over the last year, average (mean) download speeds grew 36 percent, while upload speeds increased 22 percent.

In the third quarter of 2018, the average download speed over U.S. fixed networks in the U.S. was 95.25 Mbps. Average upload speed was 32.88 Mbps, Ookla says.

“On average, U.S. consumers should have few complaints about recent increases in internet speeds,” says Ookla. Of course, rarely is anything “average” relating to the internet. There are wide variances by state, rural and urban areas, anyone would note.

source: Ookla

Comcast was was the fastest provider in the United States as a whole, in nine states and in 17 of the country’s largest cities. Cox tied for second fastest at the national level and was fastest in three states and 19 cities. Charter Communications tied with Cox at the country level and was fastest in six cities, tying for a seventh. Charter was also the fastest provider in 19 cities.

Comcast was the fastest provider in the U.S. with a “Speed Score”  of 104.7 Mbps. Verizon and Cox are close behind in a tie for second with a Speed Score of 102.57 and 101.84, respectively. Spectrum was next, followed by AT&T and CenturyLink.

The Speed Score incorporates a measure of each provider’s download and upload speed to rank network speed performance (90 percent of the final Speed Score is attributed to download speed and the remaining 10 percent to upload speed).

“The Speed Score uses a modified trimean to demonstrate the download and upload speeds that are available across a provider’s network,” says Ookla. “We take speeds from the 10th percentile, 50th percentile (also known as the median), and 90th percentile, and combine them in a weighted average using a 1:2:1 ratio, respectively.”

“We place the most emphasis on the download speeds and median speeds as those represent what most network providers’ customers will experience on a day-to-day basis,” says Ookla.

Ookla says the speed upgrades has had a significant impact on global speed rankings. The United States now ranks about seventh globally in terms of download speed.

App, Content Providers Have Invested $300 Billion in Internet Infrastructure Last 4 Years

In the four years since 2014, app and content providers have invested over US$300 billion in internet infrastructure. This amounts to US$75 billion per year, which is more than double the 2011– 13 average annual investment of US$33 billion, says Analysys Mason.  

Some 90 percent of that investment has been for hyperscale data centers and third-party data center colocation.

The balance of investment includes including terrestrial transport networks and international submarine cables and edge content caching.

The goal of the growing investment in infrastructure is to move content and services ever closer to end users, which helps to optimise service quality while controlling costs, Analysys Mason says.

There is a good reason why all wide area and local access network have become computing networks: most computing now occurs at cloud data centers, which requires communications with edge devices.  

source: Cisco

source: Cisco

In substantial part, content and app performance also drives demand for edge caching. Also, since most cross-network traffic now is video, including entertainment video, edge caching reduces the amount of traffic that has to be carried over the wide area networks.

Over time, enterprises (content and app providers) also are building their own private content delivery networks, instead of buying service from third parties.

source: Cisco

App and content providers do, however, buy a substantial amount of hosting space from third parties. Amazon, for example,  holds more leased square footage than it owns, Analysys Mason says.