Is 5G a Paradigm Shift?

Some observers use the term “paradigm shift” to describe 5G. Without getting overly picky, “paradigm shift” is a term of art, coined in 1962 by Professor Thomas Kuhn to explain the way science advances. In a nutshell, he argued that science progresses in a non-linear way.

The given consensus begins to encounter greater and greater anomalies, until finally the old consensus abruptly breaks, and a new interpretation arises. Precisely how that applies to industries and business models is never straightforward, especially since marketing grandiosity gets in the way.

But consider one way of looking at scientific paradigm shifts:

• The transition in cosmology from a Ptolemaic cosmology to a Copernican one.
• The transition in mechanics from Aristotelian mechanics to classical mechanics (motion).
• The acceptance of the theory of biogenesis, that all life comes from life, as opposed to the theory of spontaneous generation.
• The transition between the Maxwellian Electromagnetic worldview and the Einsteinian Relativistic worldview.
• The transition between the worldview of Newtonian physics and the Einsteinian Relativistic worldview.
• The development of quantum mechanics, which replaced classical mechanics at microscopic scales.
• The acceptance of Lavoisir's theory of chemical reactions and combustion in place of phlogiston theory known as the Chemical Revolution.
• The acceptance of Mendelian inheritance, as opposed to pangenesis in the early 20th century

The notion here is way beyond “big change.” Such paradigm shifts imply quantum changes (fundamental changes of state) that are “sudden, dramatic, and enduring.” Much of the emphasis here is on sudden.

It might help to look back at industry changes that could qualify as a paradigm shift, when old assumptions about the business model were broken, and were reconstituted in a new way, globally.

It is likely reasonable to require that any proposed paradigm shift affects the whole global industry, not a single industry segment or country.

A bit harder are platform changes within the industry: analog to digital switching; fixed to mobile; copper to optical access; monopoly to competitive regulation; state-owned to private ownership of firms.

Of those important changes, only the regulatory change from monopoly to competition--and government-owned to privatized firms--might universally be considered a paradigm change.

And that is a key facet for understanding when a development really is a “paradigm shift.”

Though quantum change and paradigm change often result from a long, slow period of quantitative changes, the shift of paradigm is quite sudden. As big a change as the change from “copper to optics” and “analog to digital” have been, some might not consider them quantum or paradigm changes.

The shift from fixed to mobile arguably was a paradigm change. The shift of revenue models (voice to internet access; fixed to mobile) might also qualify, but is more debatable.

In the addition to the end of monopoly, and the shift from fixed to mobile, the internet is probably the only other clear candidate most would agree was a paradigm shift.

Many firms now can use the internet to compete directly with telecom services or displace them entirely. At the same time, internet apps and services allow consumers to change their behavior, reducing aggregate demand for telecom versions of communications and entertainment products.

So Is 5G a paradigm shift? Some of us would have to conclude it probably is not. Is 5G a possible “revolution?” Yes. Even if not a paradigm shift, 5G could usher in an era where industry growth shifts from consumer to enterprise revenue sources. Will 5G pose a fundamental challenge to fixed network revenue models, on the older model of mobile substitution? Possibly, in some markets.

Failing that, 5G might still qualify as  “a big change.”

Claims that 5G is a paradigm shift are probably way overblown and hyperbolic.

Great White Shark

"We're going to need a bigger boat!"

Immediate 5G Value is Capacity, Irrespective of New Revenue Opportunities

In addition to brand-new revenue sources that should develop later in the 5G era, the immediate and practical value of 5G is to supply ever-growing capacity demands, even as 4G gets more efficient and other platforms come to commercial usage.

And 4G will continue to supply more bandwidth for the next five years, though at a declining incremental rate of increase after perhaps 2020, according to Michael Murphy, Nokia Networks CTO, North America.

source: Nokia Networks

source: Nokia Networks

The ability to aggregate Wi-Fi and unlicensed spectrum to mobile spectrum will add some bandwidth. So will 3.5 GHz spectrum, both licensed and unlicensed. But most of the new capacity will have to come from 5G, using a combination of techniques and new bandwidth.

Netflix Price Increase Illustrates Power of Powerful Brands

Consumers are price conscious, it is safe to say. So what requires explanation are instances where consumers--while seeking value--are willing to spend money for value. And perhaps nothing better illustrates the value of a valued brand.

Consider the coming increase in Netflix prices. One survey by The Diffusion Group suggests that a price increase of just $1 more per month, eight percent of Netflix subscribers are likely to cancel Netflix.

Netflix is raising the cost of its basic tier by a dollar, from $8 to $9 a month. The standard tier now will $2 more per month, up from $11 to $13, while the premium tier cost will rise from $14 to $16.

source: TDG

With the very-important caveat that consumers often say they will, or will not, do something, some of us would bet that Netflix now provides enough value that the overwhelming proportion of consumers will not desert. That did not happen the last time Netflix raised prices, for example.

Perhaps just as important, a recent price increase of similar magnitude by Amazon Prime--which some surveys suggested might have catastrophic results--did not slow growth, even if some customers might have departed.

Consider the impact when Amazon Prime raised it prices by 20 percent, from $99 annually to $119 annually, in 2018. According to one study, a whopping 45 percent of Amazon Prime customers indicated they would cancel their membership. Obviously that did not happen.

Undoubtedly there was some churn. But it appears the price increase did not have a devastating impact. According to one survey, perhaps six percent did cancel. But U.S. and global Amazon Prime memberships continued to climb.

source: Morgan Stanley

source: Consumer Intelligence Research Partners  

There are other likely impacts, as well. As Netflix raises the price umbrella, other valued streaming services will have more room to raise their own prices. That might include Amazon Prime itself, Hulu and possibly HBO Now.

On the other hand, higher prices for Netflix make harder the challenge for the scores of upstart and specialized services hoping to gain a foothold in the streaming market.

So Amazon Prime, Netflix and Apple provide key tests of the expected value of a brand, which is precisely that a valued brand allows a supplier to charge more. Valued brands can raise prices. Commodity suppliers generally have a hard time doing so.

source: eMarketer

Global Networks Now are Designed for Video

Nearly 80 percent of all global data traffic now consists of video, according to Cisco.

sources: The World Bank, Statista

By perhaps 2021, all traffic on global IP networks--save 18 percent--will consist of video, according to Cisco.

About 58 percent of downstream traffic on the global internet is video streaming content. Web traffic is about 17 percent of total, while gaming represents about eight percent of total downstream traffic.

Upstream traffic is dominated by video (especially user-generated video), web interactions and file sharing.

source: Sandvine

source: Sandvine

Also, net traffic growth is happening on private networks, rather than public networks.

source: TeleGeography

source: TeleGeography

Really "Off Road" Vehicle Concept

How Many "Mass Market" Service Opportunities Exist?

Skepticism about telco or cable involvement in the subscription video business is understandable: consumer demand is changing in ways that reduce the size of the market.

On the other hand, the consumer communications segment of the business is dominated by the four anchor services” mobile, fixed broadband, subscription video and fixed phone service, with little to no growth in each product line, at least in most developed markets.

It has long been a truism that consumer spending--in communications or entertainment--tracks growth of income (national gross domestic product, household income). The caveat is that demand for some products has declined markedly (fixed network voice), is declining (linear video subscriptions), or is growing slowly (fixed network internet and mobility).

source: Ofcom

Even in growing markets such as Asia, there simply are not that many products “most” consumers will buy, and most of what they do buy is related to mobile service.

source: Analysys Mason

The big point is that there are very few products “most” consumers will buy. And subscription video of all types (linear or on-demand; streaming or as a managed service; over the top or bundled) is among the few “mass market” services access providers can enter, once they have reached maturity in mobile voice and data; fixed network voice and data.

When Will Netflix Reach Positive Free Cash Flow?

Netflix and Amazon have been fearsome attackers of existing business models. Both firms also are equities that worry investors, often expressed as a concern over when free cash flow (and eventually actual profits) will be generated.

Eventually, as with any other company, positive free cash flow, then profits, must happen.

Morgan Stanley believes Amazon could reach free cash flow positive status could happen in 2021.

That, Morgan Stanley believes, can happen even as Netflix continues to invest heavily in content. In fact, Morgan Stanley believes Netflix is spending more than generally believed on content overall (including both original and licensed content). Other observers tend to agree with the higher figures for content rights.

Netflix spending was boosted dramatically in 2018.

source: Business Insider

NBCUniversal invests the most in original programming at the moment, to the tune of about $10.2 billion. Fox and Time Warner each spend a bit more than $8 billion. Disney has been spending nearly $8 billion, while Netflix has sharply boosted original content spending to perhaps $8 billion.

Amazon, on the other hand, has seen better free cash flow in recent years, by some estimates, even if razor thin.  

Streaming Video Bundles are Coming

The whole point of multi-product bundling, for a supplier, is to sell more products, often at lower cost, while boosting consumer perceived value. The attraction for buyers might be a bit more complex.

Saving money or convenience typically are cited as the value of bundled product purchases. But higher value at lower cost is likely the key benefit, as consumers view bundles, so long as buyers also have the option of buying a la carte.

It always has seemed inevitable that streaming subscriptions would be bundled, or at least made easier to buy within a single account, creating new forms of subscription video products that somewhat mimic the older linear video bundles of channels.  

Roku and Amazon Prime are among the firms that have been enabling such discretionary purchases.

What has not yet occurred is the ability to functionally bundle Netlfix, Hulu and Amazon Prime in the same way that a Starz or HBO subscription can be added to an Amazon Prime or Roku account. But that is coming, many believe.

The point is that if video content is balkanized--each studio ecosystem in essence becoming a channel--many consumers are going to prefer a bundle of channels that includes several of the major studio ecosystems in one account.

Some might argue that the value of such multi-product purchases is convenience: having only one bill to deal with instead of multiple accounts and billing arrangements. Some believe that is an overstated value. The real value is savings.

That seems unlikely to happen at first, in part because profit margins are pretty thin in the streaming business, to begin with, and thinner still for distributor partners. Still, some research suggests sales volume increases when bunldes of complementary products are packaged together.

In the case of streaming services, success might hinge on whether Netflix, Amazon Prime, Hulu and other services are seen as complementary, or substitutes.  

11% More Hyperscale Data Centers Added in 2018

The number of large data centers operated by hyperscale providers rose by 11 percent in 2018 to reach 430 by year end, says Synergy Research Group. And that could continue to reshape wide area network communications, as most global traffic now is generated by the hyperscale data centers.

Amazon, Microsoft, Google and IBM each have 55 or more data center locations with at least three in each of the four regions of North America, APAC, EMEA and Latin America.

Most  data traffic these days is generated by cloud computing, but most of the actual data communications--as much as 72 percent--happens within data centers, according to Cisco.

source: Cisco

As you likely would guess, hyperscale data centers represent a large portion of overall data, traffic, and processing power in data centers, accounting for 34 percent of total traffic within all data centers and driving 53 percent of in-data-center traffic by 2020.

Hyperscale data centers will also represent 57 percent of all data stored in data centers and 68 percent of total data center processing power.

At the same time, the huge amount of wide area network traffic between hyperscale data centers is causing disintermediation (substitution, or taking out the middleman) in the wide area networking business.

More than half of all WAN traffic now moves on private networks built and operated directly by enterprises, especially app, commerce and content providers.

source: TeleGeography

Alibaba and Oracle also have a notably broad data center presence. The remaining firms tend to have their data centers focused primarily in either the United States (Apple, Facebook, Twitter, eBay, Yahoo) or China (Baidu, Tencent).

In 2018 the Asia-Pacific and Europe-Middle East-Africa  regions featured most prominently in terms of new data centers that were opened.

Among the hyperscale operators, Amazon and Google opened the most new data centers in 2018, together accounting for over half of the total.

source: Synergy Research Group

Bell Canada Wants to Mine its Customer Behavior Data

North American telcos (Canadian and U.S.) historically have faced more-stringent privacy rules and limitations on data mining than have applied to app providers such as Google, Facebook and other online app providers.

So it perhaps comes as no surprise that Bell Canada began asking its customers in December for permission to track everything they do with their home and mobile phones, internet, television, apps or any other services they get through Bell or its affiliates.

And that is one of the key issues for any telco that wants to mine its customer data for insights that can be used to build a targeted advertising business.

Key to the effort, apparently, is avoidance of divulging any personally-identifiable information. "Bell's marketing partners will not receive the personal information of program participants; we just deliver the offers relevant to the program participants on their behalf," Bell Canada says.

The big upside, some believe, is the ability to earn revenue by making targeted advertising available to the Bell Canada customer base, not just properties or content that Bell Canada might own.

Xandr and Verizon Verizon Media Group provide more evidence that at least some telcos believe they can leverage data to support advertising revenue streams. Just how successful they might eventually be is yet open to question.

In principle, mobile service providers and telcos have multiple data stores they could work with, provided they have customer permission to do so: video behavior, internet access behavior, mobile phone and perhaps fixed network calling behavior.

In the U.S. market, for example, it appears internet service providers can record and sell customer browsing history, data on which apps and services are used. How valuable that might be is among the questions one might ask, in the same way that one might question the value of call detail, in an era where most of the insight is related to internet content behavior.

Telcos process and possess lots of data. But some might question how much data telcos actually can use to support advertising and marketing services, given privacy regulations and the sorts of user actions they can track.

There seems to be less doubt about ability to use some of that data to improve operations. AT&T has mined data for years to wring business value on the operations side of the business (network management, fraud detection, perhaps churn management, customer service). What seems less clear is whether there is significant revenue-affecting upside.

Obviously call detail records, mobile location and data related to customer use of internet access services is the potential mine for revenue-generating or revenue-impacting value.

The issue is how much granularity is available for the internet and app use parts of the data mine, compared to calling or text message behavior; how long such data can be retained and analysed; and how the insights can be applied to advertising or other revenue-generating activities.