5G Has Different Value for Consumers and Suppliers

For most consumer mobility apps, 5G represents not so much an experience changer as an experience-maintaining development. While some new use cases will probably depend on both 5G and edge computing, the value of 5G for most consumer smartphone apps is that it allows the network to support ever-increasing data consumption.

For most use cases, 4G latency performance and speeds are likely not a problem. What is a problem is the cost of usage. Consumers are price resistant for all products, but likely especially so for data usage charges. No matter how much data they consume, customers tend to budget only so much for that product.

spending as a percentage of total disposal income does not change much, from year to year. To the extent that increases in purchases have happened, those boosts have been accompanied by decreases in purchase of some other product. To spend more on mobility, consumers have chosen to spend less on fixed network services, for example.

So a linear increase in cost-per-gigabyte consumed is not possible. But that is why 5G is essential: it is a way to keep supplying bandwidth at lower costs per bit, to maintain supplier profit margins.

In some cases, cheaper cost per bit also enables new use cases. That especially is true for fixed wireless use cases, where cost per bit for mobile solutions has to drop by an order of magnitude, compared to fixed alternatives.

Not so long ago, mobile data prices were so high, compared to fixed costs, that full substitution was mostly unthinkable.

source: Mobile Experts

That said, the trend is clear: since the 2G era, mobile bandwidth costs have fallen by more than 90 percent. In some markets, while the gap with fixed alternatives remains about an order of magnitude, that could change in the 5G era, especially where fixed wireless is possible.

source: Mobile Experts

That is far less true for 5G appeal in the area of enterprise use cases, where very-low-latency, edge computing and ultra-high bandwidth might enable new use cases.

This forecast developed by ABI Research for Interdigital shows as well as anything the potential revenues to be generated by 5G. Note the importance of industrial revenue, compared to consumer revenue.

In this context, “industrial” revenue includes smart cities use cases. “New types of services, especially in cities and smart cities, will likely come faster when 5G becomes a consistent connectivity and processing platform,” say ABI researchers.

source: ABI Research, Interdigital

“The proliferation of connected cameras and sensors around a city, in combination with 5G connectivity and edge computing, will allow for a much more comprehensive security solution deployed throughout cities,” ABI Research says. “It is almost certain that edge computing will be deployed first in cities, and coupled with 5G, it can allow for smart transport applications.”

Every mobile generation since the first analog network has enabled new use cases and applications. In business markets, for example, 2G enabled what we now tend to call “internet of things” apps for monitoring industrial processed. During the 3G era use cases expanded to remote site data backups and kiosks. In the 4G era video surveillance became practical.

source: Digi.com

So the 5G focus on new use cases in the internet of things space are not misplaced. Of course, it is not simply the characteristics of the network but also cost per bit and other terms and conditions of use that help create new use cases.

In the 3G era I would not have considered using the mobile network full time as my primary internet access connection for work. Speed was too low and cost per bit too high. That changed in the 4G era, when I actually did replace a fixed connection with 4G.

To be sure, the use case was not “connect all the users in the home.” That remains to this day a fixed network solution, in large part because the main driver of demand is streaming video. But to support my own work needs, especially given the amount of mobility, 4G was a good choice.

Still, more important shifts tend to take time, at least in part because full deployment and advanced versions of the network will take some time.

But one of the nuances of 5G is that, for most consumer applications, the 4G network is going to be satisfactory, while Advanced 4G (LTE-A) is going to to support nearly every consumer 5G smartphone-based experience requirement.

So advanced 4G is going to be important as a way of maintaining continuity of experience as users bounce between 5G and 4G networks. Nobody wants to experience what used to happen in dropping from an area of 3G to an area of 2G, for example. For some of us, that same experience happened when dropping from 4G back to 3G.

There is reason to hope the switch from 5G to 4G will not be as abrupt, simply because consumer mobile app experience might not be noticeable when speed drops from 100 Mbps to 30 Mbps.

Still, gaming, virtual reality and augmented realitt seem to be the areas where some consumers might find 5G does actually provide improved experience.

source: GSMA Intelligence

For most of us, the transition to 5G will come more slowly, as the need to replace handsets results in acquisition of devices that can use 5G. In other words, for many, the new handset pulls with it the incentive and means to use 5G.

What remains to be seen is how soon that transition occurs, and when new use cases start to emerge. As a consumer smartphone user, the advantage seems less than was the case for migrating from 3G to 4G. Both 4G and advanced 4G seem more than adequate for my needs, at the moment.

How Will Verizon and AT&T Stave Off Attacks from the Rest of the Ecosystem?

Reasonable people can, and do, disagree about the wisdom of AT&T’s acquisitions of DirecTV and Time Warner. In fact, it is likely easier to find opponents than supporters of each move.

Many argue AT&T should be more like Verizon, and stick to mobile, or connectivity services. That’s a reasonable argument, but some would argue Verizon has different legacy assets, and therefore can pursue different revenue strategies than AT&T.

For starters, the fixed network no longer drives growth for anybody.

Verizon simply cannot grow very much in its fixed network business, so one might argue the emphasis on mobile makes sense. On the other hand, Verizon cannot grow that much in mobility, either, given market maturity.

AT&T also cannot grow very much in mobility, competing against Verizon as the leader, and T-Mobile and Sprint as the challengers.

Both Verizon and AT&T must find revenue growth, though, to fund their dividend payments. And that is where the issue of strategy becomes so perplexing. Verizon has managed its debt better than AT&T by restricting its ambitions.

AT&T has chosen to grow into new parts of the ecosystem, at the cost of high debt positions.

In the near term, financial analysts tend to prefer Verizon’s approach, and many think AT&T should retrench.

Being someone who believes the long-term trends are for connectivity prices to continue to dip towards zero, and with competition impinging on legacy revenue models, I do not believe a “stick to your connectivity knitting” approach is workable, long term.

Organic growth will be extremely difficult to maintain, and that, to me, means acquisitions will be necessary. The issue is what sorts of acquisitions are possible.

For a substantial amount of time, both AT&T and Verizon got a majority of their growth from acquisitions. In fact, the additional scale also played a meaningful part in organic growth.

Recently, Verizon has tried to grow organically, while AT&T has made acquisitions to reshape the company’s revenue streams outside connectivity.

source: Deloitte

Many do not like AT&T’s moves.

But we might ask a simple long term question: how is it safe for “connectivity services” providers to entrench in that sole role when the whole rest of the ecosystem is moving across it? It is not easy. It will be dangerous. But what is more dangerous than staying in one silo whose revenue is not growing, when profit margins continuously drop, and when competitors from other parts of the ecosystem are moving to displace the pure connectivity role.

source: Jackdaw Research

Among the other issues is the declining financial return from each next-generation mobile platform, at least in terms of the number of years of useful life obtained from each platform. Simply, return on assets has been falling, in part because each network has a shorter useful life.

source: Innosight

And if we know anything about the modern telecom business, it is that organic growth, while still important, does not tend, over time, to drive total revenue growth. To me, that means acquisitions are necessary.

source: JackDaw Research

We may disagree about which acquisitions make sense (horizontal, vertical, internationally or domestic). It seems much less contentious to argue that future acquisitions will be necessary.

As far as the wisdon of the DirecTV and Time Warner acquisitions, I have yet to see any clear evidence--from those who think AT&T should not have made one or both of those buys--that some other deployment of capital, or not spending, for that matter, would have had a better outcome for AT&T in the revenue and free cash flow areas, near term.

Hulu and YouTube TV Might be Among Biggest Streaming Winners

Hulu and YouTube are among the bigger winners in streaming video by 2022, Business Insider predicts. Sling TV and Playstation Vue are among the big losers. We might note that both Hulu and YouTube TV are anchored by their “live TV” (linear)  content.

We sometimes forget that the legacy subscription TV business (cable, telco, satellite TV) is itself an amalgam of “live” and “pre-recorded” content. The paramount examples of “live” content being “sports and news;” the best example of pre-recorded content being movie services.

In the streaming era we will see lots of niches recreated out of legacy content formats, including services that emphasize pre-recorded content; some that emphasize “live content” (sports networks, news) and many that recreate in a streaming format today’s mix of channels.

The “live streaming” segment of the market will include the specialized sports and news venues, plus what we tend to call “skinny bundles” of channels that resemble subscription TV but offer fewer channels.

Some services, including Netflix, might continue to thrive using the pre-recorded content model. Sling TV might be the original skinny bundle supplier. But there is lots of new competition coming in that segment from Hulu, DirecTV Now, YouTube TV and others.

source: Business Insider

Where Will Highest Revenue Growth Happen in Telecom, Through 2023?

With the caveat that aggregate global trends can conceal local differences, the highest-growth products in the communications business through 2023 are streaming video, mobile internet and video games. Traditional subscription television growth will be zero, while fixed broadband will grow at two-percent compound annual rates.

source: PwC

What Happens Next in Telecom Industry?

Looking at market share held by the largest three companies in the industry, one can clearly see that industry consolidation rises over time. The existential danger is the bend of the S curve late in the cycle, which shows loss of market share to new competitors or products.

For telecom service providers, the danger is that late-cycle shrinking of the core market.

Eventually, the S-curve suggests, entire markets become unstable, and can shrink, because of changes in technology, customer demand and business model evolution, almost always from outside the traditional boundaries of the industry.

source: AT Kearney

We already have seen this for key segments of the telecom industry, where long distance revenues changed from high margin, high volume to low margin, low volume. We have seen the shrinkage of fixed network voice lines in many developed markets, lower profit margins and revenue from mobile voice and messaging.

At the same time, mobility has assumed the role of driver of industry results globally, while internet access and video services have replaced some of the losses from voice services.

That sort of product replacement is normal.

The big industry question is what replaces mobility as the industry driver, as mobility growth reaches saturation.

Between 2009 and 2019, Internet Access PPI Prices Fell, CPI was Flat

This chart shows the producer price index for U.S. internet access services between 2009 and 2019. The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services, according to the U.S. Bureau of Labor Statistics.

The Consumer Price Index measures price change from the purchaser's perspective. Sellers' and purchasers' prices may differ due to government subsidies, sales and excise taxes, and distribution costs.

source: Bureau of Labor Statistics

The importance of the PPI data is that the “cost” of internet access has fallen over the 2009 to 2019 period, before service provider non-controllable costs such as taxes are added.

The importance of the PPI data is that the “cost” of internet access has fallen over the 2009 to 2019 period, before service provider non-controllable costs such as taxes are added. The same time period, looked at from the Consumer Price Index, shows what end users pay, including taxes that are part of the cost of the product.

source: BLS

Including taxes, the cost of internet access between 2009 and 2019 has remained flat.

Can, Should AT&T Divest DirecTV?

By some estimates, AT&T free cash flow overall is about 14 cents for every dollar of revenue, while Verizon earns 16 cents per dollar of revenue. So some worry about the cash flow generating capability of AT&T’s DirecTV business, which most reasonably expect to drop over time.

Some even speculate that AT&T would be better off selling DirecTV.

That might not be an easy decision. DirecTV still represents per quarter, or roughly $32 billion worth of annual revenue and probably $2 billion per quarter of free cash flow, $8 billion annually. For a firm whose financial model is based on high dividend payments, free cash flow to pay those dividends really does matter.

source: Business Insider

source: Bloomberg

Beyond all that, does it really make sense that AT&T, whose new positioning is a “modern media company, really want to chop media revenue and cash flow to reduce debt, as important as that is? Does AT&T really want to lose the bundling and churn-reduction advantages it seemingly reaps from offering video plus internet plus mobility?

Even if Time Warner arguably represents the future of AT&T’s video streaming efforts, there is no way revenues and cash flow from streaming can replace the linear video business anytime soon.

Some believe AT&T should have spent its cash on something else, such as more fiber-to-home deployments, for example. Few believe there was any way for AT&T to expand by growing its mobile or fixed network assets inside the United States.

But for some of us, that is the primary issue: can AT&T wring much more revenue out of its fixed and mobile footprint? An argument can be made that more FTTH investments would not provide the revenue or cash flow lift of acquisitions such as DirecTV or Time Warner. In fact, some would argue higher returns, and better strategic value, is possible only elsewhere in the ecosystem.

We can argue about the merits of the DirecTV and Time Warner acquisitions, compared to other possible uses of cash. But it is hard to see where else AT&T could have gotten free cash flow and revenue gains, immediately, from other investments such as more fiber-to-home or advanced LTE.

Sure, AT&T could divest DirecTV. It could use the proceeds to reduce debt. But where else can AT&T quickly boost revenue and free cash flow, were it to do so? I just do not see it.

AT&T FTTH Gains Seem Mostly Upgrades by Existing Customers

What impact is AT&T fiber-to-home having on company internet access accounts. Well, it is, as they say, “complicated.” For two decades or more, when a telco replaces copper access lines with optical fiber, it sees two types of changes.

Copper-based accounts go down, while optical accounts go up. Perhaps most of the change is simply existing customers switching from copper to fiber access services, for little net gain in total accounts.

That seems to be happening with AT&T FTTH accounts as well. According to Moffett Nathanson, AT&T achieved 57 percent growth rates for its FTTH services over the past year. But total broadband accounts have not grown at the same rate.

“Despite the dramatic growth at AT&T Fiber, AT&T’s broader IP broadband category has posted only modest subscriber gains over the past year,” the firm says.

The logical explanation is that existing customers have been upgrading to the new FTTH service, and dropping their former copper or fiber-to-node service. That also would make sense if AT&T conducted the sort of marketing campaigns cable operators do when introducing a new service: target existing customers first.

Over time, as those conversions reach an end, AT&T is likely to switch to targeting non-subscribers. Only after a few years of that activity will we be able to assess how well AT&T’s FTTH program has been in potentially taking market share from cable operators.

Which Firms Most Value "Critical Thinking?"

“Critical thinking skills” seem to be valued much more than technical expertise by executives running firms that emphasize innovation and experimentation.

That stands to reason, actually. Firms that intend to innovate people who “think outside the box,” as there often is no template to follow. Firms with other strategies, such as that of “fast follower,” only need to know enough to copy the leaders. Imitation, not thinking, is required.

Deloitte’s 2019 Industry 4.0 readiness report surveyed 612 technology, media, and telecom (TMT) respondents. Of that sample, Deloitte says 29 percent were “high innovators, firms that place a high priority on innovation and embrace experimentation, giving their leaders the leeway to learn from failure.

“Strikingly, the number-one skill that high innovators say they’re working hardest to develop isn’t technical: It’s critical thinking skills,” Deloitte says. “For less-innovative companies, critical thinking comes in last of eight skills probed.”

source: Deloitte

“Human skills” may be just as crucial to success as technical ones, overall, however. While 65 percent of respondents to the Deloitte 2018 global human capital trends survey indicated technical skills will need to increase as AI is integrated into enterprises, 62 percent pinpointed the expanding need for complex problem-solving skills, followed closely by cognitive abilities, process skills, and social skills.

30-Minute Video Tutorial on 5G Spectrum

What Happens When Mobile Spectrum Capacity is 100X Greater?

Spectrum scarcity long has been a key assumption of mobile or fixed wireless service provider business models. But scarcity is diminishing. This year, some 1550 MHz of new mobile spectrum has been released by the Federal Communications Commission. Another 3400 MHz is going to auctioned in 2019.

That will increase the amount of mobile licensed spectrum by 10 times on a physical basis, and perhaps as much as 100 times once all the other network innovations are added (spectrum aggregation, spectrum sharing, dynamic sharing, small cells, beam forming).

That comes in  addition to incremental allocations in low-band (600 MHz, 700 MHz) and mid-band (AWS), the Federal Communications Commission now is releasing huge amounts of new spectrum--both licensed and unlicensed--in the millimeter regions.

And the impact those allocations will have on mobile operator capacity are unprecedented. In part, that new capacity is required simply to support ever-growing mobile data consumption. But the almost-universal belief is that boosting capacity so much will create new use cases, apps, services and revenue sources.

Consider that the leading four U.S. mobile providers have operated with 100 MHz to 180 MHz of spectrum assets in the 4G era. But all the allocated mobile spectrum has totaled less than 1,000 MHz.

But the latest FCC auctions of 28-GHz (auction 101) spectrum represented an additional 850 MHz of new spectrum. The latest auction of 24-GHz (auction 102) spectrum added another 700 MHz of capacity.

The next auction (auction 103) of 37 GHz, 39 GHz and 47 GHz spectrum will release 3400 MHz of new spectrum, in addition to the 1550 MHz released in auctions 101 and 102.

If Verizon, AT&T and T-Mobile US won just 300 MHz each of new spectrum on a national basis in auctions 101 and 102, that would double to triple the total amount of licensed spectrum each has to work with. And auction 103 is coming.

Here’s what spectrum holdings for major mobile networks and Dish Network looked like, before the latest millimeter wave auctions.  

source: Wells Fargo Securities

In part, that new capacity is required simply to support ever-growing mobile data consumption. But the almost-universal belief is that boosting capacity so much will create new use cases, apps, services and revenue sources. Some of the use cases will develop based on ultra-low latency; others on ultra-high bandwidth.

In other instances, use cases grow not directly from 5G spectrum but from the ability to aggregate, share and dynamically allocate spectrum for private or enterprise networks as well as conventional mobile service.

The availability of so much more capacity means fixed wireless now might be feasible, on terms and conditions and make it a feasible substitute for fixed network access. That could change the fortunes of mobile and fixed network suppliers alike.

What Changes Most in Era of Mobile TV?

Looking back on all the potential changes in entertainment video over four decades, the biggest changes have been the move to higher-definition images, the shift in screen aspect ratios and screen sizes, growth of on-demand viewing and explosion of content sources.

There has been effort to change the nature of content (three-dimensional content the most recent effort). Custom viewing angles and other interactive features have, from time to time, been seen as promising.

But the shift of video viewing to mobile devices is among the bigger changes.

The average U.S. adult will spend three hours, 43 minutes watching video on mobile devices in 2019, just above the 3:35 spent on TV. Of time spent on mobile, U.S. consumers will spend 2:55 on smartphones.

source: eMarketer

What remains unclear is precisely how the “mobile TV” business will develop. So far, the biggest change has simply been the viewing of content on small mobile screens, not a change in video features, interactivity or image formats.

A reasonable assumption, based on past developments, is that business model impact will happen around viewing time on the mobile screen. There has been some effort to create aspect ratios optimized for the vertical orientation of the phone, but many of us expect the big trend will simply be mobile consumption of standard content.

In that sense, usability of video streaming on mobile devices as well as TV screens is the biggest likely driver of changes in consumer spending. “I want what I want, when I want it” remains the single most important principle of the video entertainment business.

Fixed Wireless Might be the Only Way U.S. Telcos Compete with Cable

Despite much skepticism in many quarters, there is a simple reason why 5G fixed wireless will get serious attention by U.S. telcos. There is almost no other platform that viably could keep telcos within some distance of cable operator internet access offers.

The traditional answer has been to install fiber to the home networks, but the business model now is rather sharply llimited, and the risk of stranded assets explains the dilemma.

Clearly, cable TV dominates residential broadband. Cable has about 60 percent market share nationally and has been getting essentially all the net new additions for a decade.

The problem for any new telco FTTH supplier is that 60 percent of the potential customer locations (cable operator customers) will not generate any revenue. Immediately, the problem is building a business case when 60 percent of assets are stranded and producing zero revenue.

And though linear video is undergoing a transition to on-demand streaming formats, cable operators as an industry segment continue to have the greatest share of linear video accounts. So linear video helps the business case, in the near term, but is challenging over the next decade, as that business will dwindle.

Residential voice is declining for both telcos and cable companies and is not a driving revenue opportunity for either industry segment, and not a reason for building FTTH.

Ignoring for the moment business services and residential mobility, where cable operators also are taking market share, it is a reasonable statement that upgraded fiber to home networks pose a difficult challenge for telcos, as the business case is challenging, in terms of payback. In most markets, the revenue drivers for a residential fixed network are internet access and entertainment video.

And there are many instances where those two services, supplied by a telco, face grueling odds. If cable has 60 percent share of internet access, with networks able to supply 1 Gbps now, and having a glide path to 10 Gbps, then a telco building FTTH is playing catch-up, and no more. How many observers are confident that a telco can ever gain more than 44 percent share in the U.S. residential market, at scale? Perhaps not many.

The number of third parties entering the consumer fixed network business, mostly leading with internet access, slowly is growing. And that means the residential market becomes, in some areas, a three-provider market, further limiting potential telco gains.

Video helps the business case in urban and suburban markets, but always has been a money-loser in rural areas, and in any case is a mature and declining revenue source.

Some might argue that, in the 5G and succeeding eras of mobility, the primary value of a fixed network is backhaul. That might be an overstatement, but is directionally correct. Even cable operators expect wireless backhaul to be an important opportunity.

That is why a wave of asset dispositions, which have had fixed network operators selling fixed network assets, has happened. Most recently, CenturyLink has said it is open to selling the consumer business it operates.

The bottom line is that the market limits the potential for profitable telco investments in FTTH.

All of that sharply limits telco options in the next-generation network area. The business case for FTTH simply might not work, and yet abandoning the business also often is impossible (the assets cannot easily be sold).

All that explains the interest in 5G mobile and fixed wireless access. As mobile substitution for fixed service has cannibalized fixed voice, so the hope is that wireless internet access can become an effective substitute for fixed connections. For AT&T and Verizon, that is the business answer to next-generation fixed networks where the FTTH business case does not work.

For T-Mobile US, fixed wireless is a way to participate in the fixed networks businesses it could not enter as a mobile-only service provider. For cable operators, fixed wireless is an obvious way to enter adjacent markets without full fixed network overbuilds.

Other markets might have more-favorable upside from FTTH. But it is hard to avoid the conclusion that, in a great many portions of the U.S. consumer fixed networks business, cable operators have market share that telcos will be very hard pressed to attack.

Consumer internet access speeds must be boosted, to stay within reach of cable offers, and to maintain the value of their fixed networks. Doing so when FTTH does not offer a payback is the challenge 5G fixed wireless is meant to solve.