U.K. Household Communications Spending is Flat and Fixed

U.K. consumers, like consumers anywhere, are likely to spend only so much on communications services of all types. That explains why household spending on communications (including subscription video) is constant, year after year.

So when spending on some elements grows, spending on other elements has shrunk. In the United Kingdom, as video entertainment and fixed network internet access have grown, spending on mobile services and fixed voice have dropped.

source: Ofcom

That is worth keeping in mind when examining price levels (“the cost”) of internet access, mobile service, video subscriptions, messaging or voice. To buy more of something, all other things being equal, consumers will buy less of something else.

One problem we always have when trying to determine what people actually pay for various communications services is that we must work with “list” and “discounted” prices. It often is hard to tell what percentage of customers pay the list prices or some other discounted price (through a bundle or some other promotion).

source: Ofcom

The other issue is that prices tend to climb, over time, with inflation of general price levels. For example, the buying power of $100 in 1913 was $2564 in 2018, according to the U.S. Department of Labor. The buying power of $100 in 2008 was $119 in 2018.

So even if there were no improvements in quality, and all prices rose evenly, the $100 spent on any product in 2008 would be equivalent to spending $119 ten years later.

The consumer price index also tends to track growth of gross domestic product, over time.

source: PSU

source: PSU

The point is that, looking at price levels, it is natural for prices to increase over time. It never is equally clear whether prices are risking in “real,” inflation-adjusted terms. Nor is it easy to capture changes in demand or product quality.

I used to pay as much as $300 a month for a 768 kbps internet access service. Now the list price for service at 100 Mbps to 150 Mbps is perhaps $50 (before taxes and fees).

The important point is that on a cost-per-bits-per-second basis or even in absolute (not inflation adjusted)  terms, and not accounting for other discounts, perhaps most consumers pay the same, or less than they used to,  for fixed network internet access.

Nominal prices might rise over time, as prices generally do. But cost per bit and qualitative improvements are not to be captured in the retail price data.

SIP School Survey Shows 9% of Businesses Rely Exclusively on Hosted Voice

According to the latest survey conducted by The SIP School, including responses from 374 global end user executives, 48 percent of respondents work for firms that use IP private branch exchanges (business phone systems). Just nine percent report using a hosted voice system, while 35 percent use a mixture of premises phone systems and cloud telephony.

Less than four percent use a digital phone system.

source: The SIP School

And if the economics of hosted voice do not change (recurring cost), premises phone systems at larger enterprises might never reach very-high levels.

The reason is simply that although hosted voice total cost of ownership works for the small business and mid-sized organizations in many cases, total cost of ownership still favors the premise-based PBX for larger enterprises, if the actual useful life of the switch is more than five years, even for a call center deployment, where call features are more important than for a typical enterprise.

Small entities might find the hosted solution more affordable for up to 10 years. After that, even a small entity might have a lower total cost of ownership in year 11, by some estimates.

source: Gartner

To be sure, small organizations represent the volume of business entities, if not the volume of “seats” or “users.” In principle, most businesses will use cloud voice at some point, if legacy digital voice services are shut down in favor of cloud or hosted voice.

Of perhaps 5.8 million U.S. companies, only about 19,076 have more than 500 employees. But those are the entities most likely to find premises solutions most affordable. The exceptions are those large enterprises with a substantial number of branch and smaller locations or highly-dynamic staffing needs.

source: DB Global Markets Research:

Results such as these always surprise me, though I admit I do not follow enterprise voice trends (though I used to do so). Had you asked me nearly two decades ago whether business entities (small, medium or enterprise) would have switched mostly to hosted voice by 2020 , I’d have guessed something like 70 percent to 80 percent would have done so, at least in the U.S. market.

It does not appear that has happened. Also,  40 percent global adoption (at least in part) by businesses seems high, though 40 percent adoption might be low for the U.S. market. The SIP School data suggests that perhaps nine percent of respondents only use hosted voice, while 35 percent of hosted voice adopters use a mix of premises and cloud solutions.

Gartner has estimated adoption of cloud-based business voice by perhaps 24 percent of organizations by the end of 2018. That probably includes any mixed-use instance, and likely does not imply 100-percent reliance on cloud voice.

I would still have guessed that adoption in other markets would be different. As I recall, hosted voice adoption still is highest in the United States.

The latest SIP School survey has about 40 percent U.S. respondents, so it is very likely the U.S. hosted voice adoption percentages are higher than the global totals, in terms of how organizations source voice services.

That would be true because hosted voice cost of ownership works for the smaller organization, compared to use of a premises PBX, because small entities represent most businesses, and because U.S. hosted voice adoption historically has been higher than the global adoption rate.

Still, I have been surprised that hosted voice has not been adopted faster. But the economics of a hybrid approach simply remain compelling: premises switches for large locations; cloud for everything else.

Brand Finance Global 500 Shows Dominance of Internet Ecosystem Firms

The latest Brand Finance Global 500 study might be an illustration of the power and influence of the broad internet ecosystem. You might note that firms with device, commerce, application or networking roles occupy the top nine of ten spots at the top of the listings.

source: Brand Finance

Also, the growing role of commerce, advertising and other platforms is clear. “Change at the top is reflective of a wider global trend as the technology sector accounts for more than twice as much brand value as telecoms,” the latest study notes.

The other obvious trend is growing share of Chinese firms. “The growth of Chinese brands extends beyond the technology sector as the country continues to narrow the value gap with the United States at an impressive rate,” the report says. Since 2008, China’s share of global brand value has increased from three percent to 15 percent.

Among telecom firms, Telstra “continues to perform exceptionally well across a number of brand attributes, with a resulting 14 percent increase in brand value to US$12.4 billion,” the report states.

Still, the study notes that brand strength and market value are not synonymous. “The strength of the brand is in contrast to the overall decline in Telstra’s market value of 21 percent,” the study says.

So brand value does not always translate into equity value.

New Study Finds "No Significant Effect" of Broadband on Productivity

The consensus view on broadband access for business is that it leads to higher productivity. But a new study by Ireland’s Economic and Social Research Institute finds “small positive associations between broadband and firms’ productivity levels, none of these effects are statistically significant.”

“We also find no significant effect looking across all service sector firms taken together,” ESRI notes. “These results are consistent with those of other recent research that suggests the benefits of broadband for productivity depend heavily upon sectoral and firm characteristics rather than representing a generalised effect.”

“Overall, it seems that the benefits of broadband to particular local areas may vary substantially depending upon the sectoral mix of local firms and the availability of related inputs such as highly educated labour and appropriate management,” says ESRI.

In other words, broadband--in and of itself--might not be a general driver of enhanced productivity or economic growth, absent other more-basic drivers. Some earlier studies do not clearly establish a direct relationship between productivity and broadband, except in the computing and information technology industry itself.

To be sure, economic activity and broadband are correlated. What is harder to determine is the degree of any causality, though many studies suggest broadband is correlated with economic growth, productivity and income.   

ESRI does note that  “significant gains from broadband availability in two services sectors: information and communication services and administrative and support service activities.”

Some have looked at the application of information technology and called it a productivity paradox. “You can see the computer age everywhere but in the productivity statistics,” Professor Robert Solow famously said.

In fact, productivity sometimes has dropped after more information technology was deployed. Of course, there could be other explanations. Productivity might have dropped for other reasons. IT might have prevented faster productivity declines. Perhaps we can not measure the productivity gains (qualitative improvements perhaps cannot be quantified, by definition).   

Some believe the earlier productivity paradox in computing now is seen in cloud computing, the internet and mobility as well, though productivity did seem to rise in some industries. Perhaps few would argue that information technology does not matter.

Still, despite the instances of correlation, causal relationships remain tough to identify. We note that consumption of high-quality broadband services is correlated with high income and education levels, for example. We might note high correlation between broadband and economic activity. Still, a causal relationship never is completely clear.  

It might be the case that high economic activity attracts highly educated and better-compensated people, who then have the resources to buy quality broadband, and live where that can be accomplished.

Economic Realities, Policy Myths Abound, Says George Ford of Phoenix Center at PTC'19

Telecom and internet regulators often create policies that have effects opposite of what they intended. They want more competition and then create policies that lead to less competition. They want more investment in next-generation networks and produce less. Good intentions produce harmful policies.

Those were some of the themes Dr. George Ford, Phoenix Center chief economist, discussed from the center stage at the recent PTC’19 conference. The point, he said, was that policies on competition, investment, network neutrality, broadband deployment and sponsored data access have had the opposite impact from what was intended, or hoped for.

One example, he noted, is the effect of U.S. net neutrality regulation on capital spending. “Most of the analysis was silly,” he argued. Comparing capital spending from one year to the next several, after the new rules, “is meaningless.”

“The question is what would capital spending have been absent the regulation, which requires the construction of what we call a counterfactual,” Ford says.

Ford is about the the only human being in the communications industry to take seriously the notion of the counterfactual, a concept similar to opportunity cost.

As applied to communications policy, the problem is that claims are made about policies producing an outcome, without the ability to show what might have happened if a different policy choice had been made.

In an investment context, opportunity cost represents the benefits an investor might have reaped by making a different choice.

One clear example is the debate over whether infrastructure investment grew or declined because of network neutrality rules. A counterfactual analysis is always necessary when looking at policy outcomes, in other words.

It is possible that infrastructure investment might have been higher in the absence of net neutrality rules, for example. In principle, such investment could also have been lower, in the absence of the rules.

The same principle applies for analysis of fair use rules, or virtually any other proposed public policy.

Another example is competition policy, which normally takes the form of policymakers desiring “more competitors” in the market. Ford quipped that the desired number of competitors is always “one more.”

“Policy makers often call for aggressive price competition, not realizing that doing so will, in turn, reduce the number of sellers, which they then lament,” Ford says. Ironically, “where a small number of firms exist, that outcome may be the result of aggressive competition, rather than an indicator of lack of aggressive competition,” Ford notes.

The other obvious problem is the capital intensity of communications access networks. That limits the number of viable firms. In most countries, “one” is believed to the viable number of fixed access networks, leaving wholesale as the only option to increase the number of retail providers. Some markets, such as the United States and Canada, have two and sometimes three fixed network competitors in the consumer markets, which is a bit of an anomaly, globally.

The point, Ford says, is that a small number of suppliers in fixed networks is the result of economic conditions, not a failure of policy. “If only two firms can profitably offer the service, then demanding more is wishful thinking and prone to produce bad policy,” he says.

“In my experience, ‘promoting competition’ is unlikely to have a material effect on actual competition.  In fact, it often has the opposite effect,” says Ford.

The 5G Killer App--Early On--is Capacity

What use cases will drive the volume in the early days of 5G? Prosaic, drop-dead-simple use cases related to internet access.

Most observers think at least some new use cases, revenue sources and business models will emerge in the 5G era, especially in the enterprise space, where most of the internet of things and ultra-low latency processes are likely will occur.

Little of that will happen for years, and volume deployment might take a decade or two (big new use cases often take that long to become ubiquitous).

So what happens at first? Early adopters buying 5G might do so because they value having internet access as much as an order of magnitude faster than the 4G they use today. Few will find they experience that big a change, and when they do, it will not be “everywhere,” but likely “some places” they routinely use their devices.

The challenge is going to be that a consumer mobile user who wants a generally-faster experience is more likely to get such an experience from the latest generation of 4G, not 5G (at first).

Keep in mind that 4G is going to get faster. If what a consumer really wants is faster speeds, then 4G is going to be a very-satisfactory solution, in many markets, offering perhaps three times to five times the speed of earlier 4G networks.

source: TeliaSonera

Latency performance is the other big early 5G difference, but it seems unlikely many consumers will have use cases that can take advantage of the ultra-low latency, with the exception of downloading and similar use cases. 4G latency also is improving, though.

The use of 5G as a fixed wireless platform is a form of mobile substitution where the end user value is internet access that rivals fixed network services. There are reasons for mobile service providers to use fixed wireless, though. It might lower the cost of upgrading networks to compete with cable TV operators.

That might also be true for ability to serve enterprise and smaller business as well.

The point is that the early-stage 5G enterprise apps sold in volume are probably going to be prosaic and focused: mobile substitution of fixed network data services; as well as services for workers who value faster downloads.

Other than faster speed or fixed internet access,  the early consumer use cases might be qualitatively different if mobile service providers can create and package (create tariffs and bundled offers while managing the usage caps) offers that feature mobile casting to TVs.

Of course, mobile service providers are creating their own streaming services (both linear and on-demand). Perhaps there also is some opportunity for “mobile casting” as a substitute for linear TV in a more direct sense (use the mobile as the internet connection, the service and the casting device).

But that would take some time, if it even is worth pursuing. In the near term, 5G is going to be about internet access speeds and costs, in both business-to-business and business-to-consumer market segments.

Mobile service providers also have internal reasons for deploying 5G. To keep increasing the supply of bandwidth, a shift from 4G has to be made, in any case, as 4G eventually will run out of gas.

Put another way, the killer app for 5G, early on, is capacity.

source: Nokia

Back to Monopoly?

Reliance Communications is exiting the mobile  business. There is a bigger question: after nearly 40 years of deregulation and privatization, intended to increase innovation and investment in communications, are we headed for a return, in many markets, to monopoly? 

Innovation Awards Program Gets Traction

Most people are not aware that the Pacific Telecommunications Council is a non-profit entity,  created more than 25 years ago to foster commercial adoption of communications and information technology across the Pacific basin.

Aside from serving its member companies, PTC also has programs that train young professionals to serve in the communications business;  provide leadership training for mid-career professionals on the way up and promotes internet access in rural areas across the broad Asia-Pacific region. 

A new program, Innovation Awards, not only recognizes leaders who are pushing the industry forward, but also now underpins a dedicated fund raising effort to support PTC's philanthropic missions. 

The Industry Awards ceremony, is a tax-deductible contribution (above the value of the meal) that directly funds our non-profit programs. But the awards program--open to all, and not restricted in any way to PTC members and the community--itself has gotten big traction in only its second year. 

Isabel Paradis, chair of the judging committee, talks about the program, which featured a panel of judges indicative of the industry's future, not its past. 

Netflix the Albanian Army?

Jeff Bewkes, then Time Warner CEO, in 2010 quipped, referring to Netflix, “Is the Albanian Army going to take over the world? I don’t think so.”

Today, more than 76 percent of 128 million U.S. broadband households take at least one major streaming service (Netflix, Amazon or Hulu) according The Diffusion Group. Another eight percent buy a linear streaming service such as YouTube TV or DirecTV Now.

A Deloitte study found the average streaming household subscribes to three services, and that doesn’t include ad-supported services.

Perhaps more significantly, Netflix has changed the video ecosystem’s business model. Now that Netflix has become the world’s first global television channel, other would-be leading competitors will have to glo global as well.

source: Netflix

Competition is coming, though. Netflix, Amazon and Hulu will continue to dominate the U.S. streaming services market, but will face scores of new services launched by broadcasters and content creators. Revenues are forecast to hit $21.22 billion in 2020, up from $16.38 billion in 2017, Ooyala believes.

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.