5G is Like "Fourth Industrial Revolution"

You know 5G "is a thing" now that the phrase pops up so much in the consumer media. But much of the characterization is like our understanding of fourth industrial revolution: a high level complex of many changes beyond the narrow understanding of the term.

Among the reasons 5G sometimes is hard to understand is that it has become a verbal shorthand for several relatively independent changes in the computing, applications, infrastructure, private and public networks areas. The changes are linked and often dependent upon each other.

At one level, 5G is the next generation mobile platform.

At another level it is a part of a complex of changes including edge computing, internet of things, commercialized millimeter wave spectrum, access methods and business model changes.

source: Gemalto

When observers or supporters talk about the advantages of 5G, they sometimes actually are referring to the advantages of edge computing or internet of things. If one looks at the specifications for 5G, one sees quickly that it is application-focused in a few key ways.

The network is optimized to support devices with extremely long battery life, a characteristic of many internet of things use cases. The network is far more dense, supporting orders of magnitude more devices per local area, again an anticipation that many more devices (not phones) are going to be connected.

The ultra-low latency design means some new use cases requiring such performance will be supported in the network for the first time. But ultra-low latency also implies local computing, within a device, on the premises or very close to it. The 5G network latency only helps so much if intensive data operations must be performed at remote cloud data centers.

Ultra-low latency applications sometimes will require both edge computing and 5G. Connected vehicles might require extensive new vision and sensing systems; robust edge computing and ultra-low-latency communications.

Edge computing might involve devices, local area networks, enterprise mainframes, off-premises but local computing and cloud computing as well, with a mix of wide area network connections.

Nor are all the use cases necessarily built on 5G access. Sometimes the local connections will use Wi-Fi or some other short-range wireless technology. Local access can be by optical fiber, cable modem, fixed wireless, mobile network, satellite, low power wireless networks, TV white spaces or other platforms.

New ways of using spectrum (sharing, aggregating), license modes (unlicensed, shared, licensed) and commercial use of previously-uneconomic spectrum (millimeter wave) also are part of the broader changes colloquially called “5G.”

And while 5G will enable some new consumer apps, it might be most distinctive for enabling new enterprise use cases.

So welcome to the somewhat-confusing world of 5G, where much of what is talked about is not just 5G, or sometimes not 5G, but something else.

In other words, 5G as a popular concept is more than the next generation mobile network. It often includes edge computing, internet of things, applied artificial intelligence; different or new roles in the infrastructure ecosystem; commercialization of previously-unusable spectrum; new ways to access and use spectrum and new business models.

Just remember that not everything that happens is 5G, even if that seems to be the easy catch phrase to describe a whole bunch of changes.

The fourth industrial revolution, of which 5G is, by design is a high-level concept describing a range of technology changes that is blurring the lines between the physical, digital, and biological spheres.

Such a characterization calls the First Industrial Revolution the time when water and steam were applied. The Second revolution used used electric power. The Third used electronics and information technology.

The fourth industrial revolution is characterized by a fusion of technologies that is blurring the lines between the physical, digital, and biological spheres, some say.

source: Principa

Such a characterization calls the First Industrial Revolution the time when water and steam were applied. The Second revolution used used electric power. The Third used electronics and information technology.

The main point is that we are moving beyond "information technology" and "mobility" and even the "internet" to some new phase where artificial intelligence, sensors and augmented reality play key roles underpinning the economic system and life.

The analogy is that 5G is used in a broad sense (5G mobile, IoT, applied AI, edge computing, virtualized networks, millimeter wave spectrum, new ways of using spectrum, new use cases and business models) as well. Many who speak of the 5G "revolution" actually refer to one of the other linked changes, more than 5G the access platform.

It is big, complicated, hard to quantify. 

FTTH has Not Changed U.S. Broadband Market Share

With U.S. telcos and cable TV companies competing in the same lines of business, our traditional nomenclature long ago ceased to reflect reality. “Telcos” are not in the “voice services” business and “cable TV” companies are not in the “video” business.

The anchor service now is internet or mobile access, no matter which type of provider supplies the feature.

source: US Telecom

But the two industry segments remain largely distinct in terms of supply chain, network platform and culture, and we still have no elegant and clear way of describing both types of firms, much less the way to characterize business-focused or specialty providers of connectivity and infrastructure services such as metro fiber providers.

It still is meaningful to speak of the different business dynamics in different key segments. By and large, “cable TV” contestants are moving into lines of business long dominated by “telcos,” while the reverse process applies to traditional communications suppliers. But even some former cable TV firms are moving towards a largely post-video future based on becoming largely providers of communications services.

But it remains a clumsy matter. “Tier one” also remains a relevant way of categorizing firms in the business. And at least for a while, it appears the distinction between mobile-only, fixed line and firms with both kinds of assets will remain relevant. But even those categories are in motion.

Nor can we yet determine how to fit new access platforms into the framework. Low earth orbit satellite constellations, TV white spaces or other more-novel platforms will get some market share. And fixed wireless providers might become more important, though perhaps moving market share statistics mostly in rural areas.

Is a 50-50 Revenue Split for Apple News+ Unreasonable?

Content suppliers for Apple’s news-based subscriptions complain about revenue splits (as did app and game suppliers about similar distribution costs in the App Store). The channel conflict is real enough: unless a content supplier can go direct to consumer, distribution represents  a healthy chunk of total cost to deliver a product.

In principle, distribution costs include direct sales; advertising; packaging; incentives for distribution partners; credit and bad debt costs; market research; warehousing; shipping and delivery; invoice processing; customer service and returns processing, for example.

In some industries, the “cost of goods” can range from 30 percent to 80 percent of total retail cost. That might be likened to the digital content Apple will distribute.

source: McKinsey

Granted, traditional distribution operations have been oriented around physical products, not software, streaming and non-tangible products. One study suggests direct supply chain costs  represent four percent to 10 percent of cost; direct transportation costs a couple of percent to 10 percent of revenue; warehouse or distribution center costs perhaps two percent to 16 percent of revenue. The larger point is that distribution can range from a low of 10 percent to a high of 35 percent of total retail cost.

source: R. Pinon

The point is that any content supplier can go direct or indirect. Apple’s News+ is an indirect distribution or sales channel. What that is worth is a matter of perceived value and market power, played out in contract negotiations.

So much of the disagreement about revenue splits harken back to the older arguments between content owners and distributors generally. In the U.S. linear video business, some argue sports content alone represents half of the retail cost of the service.

It might therefore be the case that distribution (everything required to get the content to the end user) represents 40 percent or so of total end user price.  

source: Pocket Gamer

The point is that a 50-50 split of revenues between Apple and any specific content owner might seem out of whack. The alternative is the cost to sell the product direct versus indirect, using Apple. And that is far from an insignificant cost for any supplier, even of digital goods.

Stable, Competitive Markets Have a 4:2:1 Structure

Bruce Henderson, founder of the Boston Consulting Group is credited with a couple of foundational ideas about business, including the notion of the experience curve, which explains how the cost of products decreases with volume.

“Costs characteristically decline by 20 percent to 30 percent in real terms each time accumulated experience doubles," Henderson posited in 1968.

Among the ideas some may deem most important relates to market structure under conditions of competition.

"A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” Henderson argued.

Sometimes known as “the rule of three,”  he argued that stable and competitive industries will have no more than three significant competitors, with market share ratios around 4:2:1.

There are important implications. We may decry “bigness.” We may prefer that a plethora of firms exist. But the rule of three suggests a robustly competitive market will, over time, assume a stable form where three firms dominate, with market shares have a specific structure.

To wit, the leader will have market share double that of company number two, while company number two has twice the market share of the third firm. Empirical studies tend to confirm the pattern.

In most markets, argue Bain consultants, two firms have 80 percent of the profit. In other words, market share also often is a proxy for profitability. “On average, 80 percent of the economic profit pool was concentrated in the hands of just one or two players in each market,” say Bain and Company consultants. In other words, it really matters if a firm is number three in any market.

That virtually perfectly corresponds to a market share pattern of 4:2:1, as the number-three provider tends to have less than 10 percent share, in that pattern.  

One sees this pattern in some telecom markets. Looking at market share and return on invested capital for the three largest telecom providers in Thailand, China, and Indonesia since 2015, you can see that financial return and market share tend to be directly related.

The real-world structure does not precisely match the rule of three prediction, of course, with Thailand having the almost-perfect correspondence between predicted results and actual results.

In many other markets, two observations are apt: where the 4:2:1 pattern does not exist, markets either are not competitive, or not stable, or both. And though we might be tempted to think such patterns exist mostly for capital-intensive industries, the pattern seems to hold in most industries.  

Source: Reperio Capital

My rule of thumb incorporating the “rule of three” is that the leader has twice the share of number two, which in turn has twice the share of provider number three. In Thailand, China and Indonesia, the general pattern holds.

In Thailand the pattern holds well. The leader has 53 percent share, number two has 31 percent and number three has 17 percent share.

Applying the rule of three in consumer telecom markets is complicated, however, since the “markets” include segments such as video entertainment, internet access, voice and mobility where specific players have distinct market share profiles.

The broad conclusion is that telecom markets are not yet stable.  

Writing and Thinking Go Hand in Hand in Business Communications

Writing and thinking go hand in hand, it often is said, and said again. Fuzzy writing often indicates fuzzy thinking.

“In fact, clear thinking is the most important (and most often overlooked) aspect of good writing,” which in addition is something most managers find they must master, since communication with superiors, peers and direct reports becomes more important.

When one is good, the other is likely to be good as well.  

“Think like a journalist” is another bit of advice for business people when writing for other colleagues.

Journalists are trained to use an inverted pyramid when constructing stories, putting the most important “so what?” information first, then adding detail later, with word economy always important.

source: Pressbooks

Busy executives will always want you to get to the point quickly. It likely cannot be said too often: clear writing is the result of clear thinking.

Still Little to No Evidence Broadband Actually Improves Productivity

You would be hard pressed to find any evidence for the thesis that broadband clearly boosts firm productivity, even if we all seem to believe that is the case. Some studies that find some small benefit cannot separate broadband from the other information technology introduced at the same time. But most of the time, it is hard to identify a clear correlation, much less causality.

As a practical matter, governments and others will continue to argue that broadband service has to be improved, because, you know, productivity will improve and economic growth will be aided. And, as a practical matter, firms will continue to deploy, and customers will buy, better broadband.

Still, it is worth noting that there is scant proof that broadband improves productivity.

“We find that the average effect of UFB (ultra-fast broadband) adoption on employment and... productivity is insignificantly different from zero, even for firms in industries where we might expect the returns to UFB to be relatively high,” say researchers Richard Fabling and Arthur Grimes,

One study found no correlation between broadband and productivity, when looking at digital subscriber line deployments. Another study also found no causal link between broadband use and productivity.

Yet other studies suggest that firm using more information technology, including broadband, do raise productivity, though it is not clear whether it was the broadband or the other innovations that contributed.  

Some studies note that it is difficult to tell which came first: a firm’s ability to wring value out of information technology, or broadband enabling that for a firm.

“One view is that good firms with good managers do most things in a better way, including use new practices at the right time,” note researchers from Stockholm University. “This makes studies of the impact of innovation, new management practices, work organisation and ICT use meaningless, since the good firms are much better in many other ways which are and can not be measured.”

Broadband and productivity seem to link together in a positive way, the researchers found. “If the company has broadband it is more likely that it will have higher productivity,” they say.

The study found that more productive firms use more technology. The problem is that researchers cannot conclusively say the correlation is causal. Maybe firms that use more technology are better at running their businesses. In any case, the researchers do conclude that “ICT use improves firm productivity.”

To be sure, virtually everyone assumes that broadband is good, and that faster broadband is better, even when studies do not suggest (whatever the social or educational value) there is a clear and quantifiable link between broadband and business productivity.

How AI Gets Used in Telecom

A survey of chief information officers by Gartner finds that 52 percent of telcos now use artificial intelligence in the form of chatbots.

IDC says 64 percent of telecom service providers are investing in AI systems to improve their infrastructure operations as well.

ZeroStack’s ZBrain Cloud Management, which analyzes private cloud telemetry storage and use for improved capacity planning, upgrades and general management.

Aria Networks, an AI-based network optimization solution that counts a growing number of tier-one telecom companies as customers.

Sedona Systems’ NetFusion, which optimizes the routing of traffic and speed delivery of 5G-enabled services like AR/VR. Nokia launched its own machine learning-based AVA platform, a cloud-based network management solution to better manage capacity planning, and to predict service degradations on cell sites up to seven days in advance.

Broader applications include applied AI for self-optimizing networks, software defined networks, network functions virtualization, marketing (personalized offers, advertisements), public safety use cases, traffic management, local event management, distributed cloud services or low-latency services.

Many of those apps also will support edge computing use cases.

SD-WAN Upends "Cheaper, Faster, Better: Choose 2" Choices

Many networking or computing alternatives offer value in terms of lower cost (capital and operating cost). SD-WAN offers a good example. The classic engineering trade off for all IT or communications alternatives is pretty simple: “You can have it cheaper, faster, or better, pick two.”

SD-WAN promises to demolish that set of choices by allowing improvements on all three dimensions, especially for connecting remote locations and branch offices.

SD-WANs offer better agility (faster and simper deployment), better performance and reliability while also reducing costs.

Software-defined WANs, as the name suggests, abstract edge connectivity and also  virtualize the WAN. In an overlay SD-WAN, new SD-WAN appliances are deployed on an existing routed network, either behind the routers or replacing them as the branch connection to the WAN, analysts at Nemertes Research note.

SD-WAN appliances also can collapse the typical branch stack by replacing other branch WAN appliances such as optimizers and firewalls.

In-network SD-WANs--often tied to Network Functions Virtualization--are more important for managed service approaches, and might be more attractive to enterprises that prefer to offload or outsource WAN management to third parties.

source: Nemertes Research

Lies, Damned Lies and Statistics

Nothing remains unchanged in the modern communications business, so we should not be surprised at how much, and how fast, “average” fixed network internet access speeds increased in the U.S. market in 2018.

To be sure, the actual value or meaning of most cross-country internet access statistics is nuanced and perhaps somewhat questionable.

“Do counties with mostly 25 Mbps broadband connections fare better economically than counties with mostly 10 Mbps broadband connections?” George Ford, Phoenix Center chief economist rhetorically asks. “I find no evidence of such an effect here, at least with respect to the growth in jobs, personal income, or labor earnings between 2013 and 2015.”

“Broadband (and higher speed broadband) is not randomly distributed across geography, but rather is deployed in areas where the ratio of demand to costs is favorable, complicating the task of discovering broadband’s influence on economic outcomes,” Ford notes.

To cite just one example, “population density in counties with predominately 25 Mbps service averages 603 persons per square mile, but only 32 persons-per-square-mile for counties with predominately 10 Mbps broadband service,” Ford notes.

According to measurements by Ookla, fixed network internet access speeds increased by nearly 40 percent in 2018 alone, largely on the speed boosts instituted by cable TV providers.

But that is not the only surprising statistic one might encounter.

A 2014 study of broadband adoption in the United States and European Union contained some surprising comparisons. On several key measures--including faster speeds, 4G service, fiber to home and cable modem service, the United States had a large lead over EU nations as a whole.

By 2017, the take rates for fixed network internet access remained at 75 percent, though coverage (ability to buy) was at 97 percent.

Perhaps significantly, a European Commission report recently said that “although fixed broadband is available to 97 percent of EU homes, 25 percent of homes do not have a subscription.”

One apparent reason is that although subscription growth “was very strong until 2009, but has slowed down in the last few years, partially due to fixed-mobile substitution," according to Techknowledge.

In 2017, about 15 percent of EU homes bought internet access at speeds of at least 100 Mbps. In 2016--a year earlier--about 23 percent of U.S. homes were buying service of at least 100 Mbps.

By the end of 2018 the average U.S. fixed network internet access speed was 95 Mbps, according to Ookla meaning half the customers had speeds faster, while half had lower speeds.  

The EC study also highlighted the importance of taxes when comparing retail prices for services such as linear video subscriptions. The posted retail prices are one thing; the actual costs--including all taxes--are something else.

As the study illustrates, even if posted retail prices for U.S. cable TV video are higher than Denmark’s prices, for example, the net cost of service in Denmark is higher, because of higher taxes.

The larger point is that although most casual observers would assume the EU has higher percentages of internet access connections running at 100 Mbps or faster, that is not true. Nor is it the case that customers actually buy services at such speeds, even when available.

It is good public policy to make quality broadband service available. It is a separate matter whether consumers want such services, how much they are willing to pay for it and--most importantly--what economic and social value can be wrung from such usage.

It is difficult to impossible to confirm that speed increases beyond 100 Mbps (or any other minimum speed) actually produce quantifiable economic or social outcomes.

Global Telecom Growth Less than Rate of Inflation

Telecom never has been classified as a “growth” industry, as equity analysts use the term. In fact, for most of its history, telecom was a “public utility,” viewed much as are electrical and water enterprises are seen.

That is to say, connectivity providers have often been government owned, highly regulated enterprises not expected to grow revenues more than the rate of inflation.

The era of mobile communications has shaped our perceptions in new ways, compounded by the privatization and deregulation waves that began in the 1980s.

As mobility has become the way we supply communications services in those parts of the world that never had robust communications in the past, it has seemed that telcos could become “growth” engines.

Once we reach saturation of facilities and services, the older framework is likely to reassert itself. The most-recent revenue forecast by STL Partners suggests revenue globally will grow less than the rate of inflation through 2022. That might, in fact, be the future and fundamental reality. Essentially, the global telecom business will begin to contract, in real terms, even as nominal revenue grows, albeit less than does inflation.

And even that outcome also hinges on service providers being able to discover and create enough new revenue sources to replace about half their current revenue every decade. Barring such success, revenue will contract faster.

  

source: STL Partners

That will be unsettling. A reasonable observer would safely make a few predictions. No industry that is contracting can avoid major waves of consolidation; some bankruptcies and business model changes for the survivors.

It will not be fun, for most.