5G Will Affect Network Architectures

Before the advent of mobile communications, networking architectures all were simple. Public networks (telcos) supplied wide area communications to a premises, while inside buildings customers created their own internal distribution networks.

Architectures are less clear now that new platforms such as Citizens Broadband Radio Service and spectrum sharing and aggregation are emerging. One might argue that “mobile” architectures might, in many cases, take the older fixed network form.

The classic example is the consumer in-home network or any business local area network, with a clear physical and logical point of demarcation between the WAN and the LAN.

The WAN consists of assets owned by the service provider and the LAN facilities are owned by the consumer, tenant or building owner.

source: Router-Switch

That became more complicated with the advent of mobile networks, which theoretically provide direct connection to the end user device, no matter where it is located. In practice it sometimes is more complicated.

A smartphone can be used as a Wi-Fi hotspot, which then creates a private network within a premises or any other local area. In that case, the public network (WAN) terminates at the device acting as the hotspot, all other potential devices connected to the hotspot then constituting the LAN.

In other cases a multi-radio Wi-Fi network with repeaters also creates a more-substantial LAN.

Indoor coverage, always an issue since 3G, is going to become a bigger challenge in the 5G era, when higher frequencies in the mid-band and millimeter wave region will be employed. And that is going to recreate the space within which LANs make sense.

Signal propagation is the reason: many 5G signals, while adequate outdoors, will have signal strength issues indoors. One way to illustrate this, shown below, is that signal propagation through walls, from the public network (cell towers), decreases with an increase in frequency.

source: Surecall

Another illustration illustrates the principle that cell site signal loss increases with frequency, while coverage decreases.

source: Look Far

All of that means there is potential new terrain for 5G and subsequent mobile networks to use the WAN-LAN framework, where private networks might assume greater roles inside buildings. That, in turn, means there might be new roles created for connectivity providers.

As Boingo and others have specialized in creating private Wi-Fi networks for venues, so it might happen that entities also provide 5G mobile coverage indoors. Whether that is the mobile operators, neutral-host providers or enterprises and consumers themselves remains to be seen.

CBRS, for example, can provide indoor coverage or traditional access to premises for 4G mobility services. The former use case is most likely with enterprise venues; the latter will be most common in consumer settings. CBRS can be used to create indoor private 4G networks. CBRS also might be used to support small cell or wireless fixed access networks.

Indoor 5G coverage methods already are available. In some cases service providers with licensed spectrum will deploy the systems. In other cases, third parties might use unlicensed spectrum to create their own indoor networks.

Ericsson 5G Radio Dot Launch from Ericsson

The point is that from both a business model and technology standpoint, heterogeneous mobile networks are coming. In some cases, service providers directly will deploy indoor infrastructure in the form of small cells.

In other cases they may partner with third parties to install and operate such infrastructure. In yet other cases enterprises or consumers might create their own LANs.

AT&T View of Fixed Wireless for Internet Access

U.S. Fixed Network Internet Access Market Could be 5% Away from Full Adoption

Consumers sometimes make surprising choices. Consider that 60 percent of people surveyed by the Pew Research Center who do not buy a fixed network internet access service say they never have had high-speed internet service at home in the past.

Some 33 percent say they have had fixed network internet in the past.

But the most-surprising finding is that “most non-adopters are unenthusiastic about the prospect” of buying fixed network access. “Fully 80 percent of non-broadband users say they would not be interested in having broadband at home,” the researchers note.

It is not that they cannot buy it, because the service is not available, nor necessarily because the service is too expensive. Rather, many consumers simply feel their smartphones do everything they need, where it comes to internet apps and services.

source: Pew Research Center

That implies that 100-percent fixed network broadband adoption is about 78 percent (present buyers and 20 percent of the non-buyers). Adoption at the moment is 73 percent, suggesting there is about five percent more adoption before the market is fully saturated, and every potential buyer already is a customer.

That is important when assessing the state of internet access adoption in the U.S. market. The percentage of survey respondents who say they have broadband service at home grew from 65 percent in 2018 to 73 percent in 2019.

Some 27 percent of survey respondents do not buy the product, say researchers at Pew Research Center. “And growing shares of these non-adopters cite their mobile phone as a reason for not subscribing to these services.”

source: Pew Research

Even in advance of 5G, which will in many cases become a full substitute for fixed network internet access, 17 percent of survey respondents say they already are “mobile only” for internet access.

source: Pew Research

As has been true in the past, income and education play key roles in propensity to purchase fixed network internet access. Some  92 percent of adults from households earning $75,000 or more a year say they have broadband internet at home, but that share falls to 56 percent among those whose annual household income falls below $30,000, according to the Pew Research Center.

source: Pew Research

China Now Accounts for 21% of Global Internet Users

China now accounts for 21 percent of global internet users; India 12 percent; the United States eight percent, according to Bondcap analyst Mary Meeker. Based on population, China and India eventually will represent even more share.

source: Bondcap

U.S. Households Might Spend 1.2% to 2.8% of Household Income on Voice Services

According to U.S. Bureau of Labor Statistics data, households headed by an occupant who did not graduate from high school spend a bit less than three percent of household income (2.8 percent) on phone service.

Households headed by an occupant with a graduate degree tend to spend about 1.2 percent of household income on phone service.

The differences seem to flow from household income, which BLS data shows varies directly with educational level.

It is not clear how spending on video services and internet access varies with educational level and income, as those services seem not to be directly tracked by BLS.

Household Spending, Homes Headed by Occupant with Less than High School Education, $28,245 in spending (98.5% of total income), 2.2 people (0.7 income earners, 0.6 children, and 0.5 seniors)

source: Visual Capitalist

Household Spending, Homes Headed by Occupant with a High School diploma, $35,036 in spending (87.3% of total income), 2.3 people (1.0 income earners, 0.6 children, and 0.4 seniors)

source: Visual Capitalist

Households headed by high school graduates, with income of $40,147 and 2.3 occupants spend about the same--2.7 percent of income--on phone services.

Households headed by an occupant with a bachelor’s degree, with $92,409 in income, spend about 1.7 percent of income on phone services.

Household Spending, Homes Headed by Occupant with a Bachelor’s Degree, $63,373 in spending,  2.5 people (1.5 income earners, 0.6 children, and 0.4 seniors)

source: Visual Capitalist

Households headed by an occupant with a graduate degree spend about 1.2 percent of income on phone services.

Household Spending, Homes Headed by Occupant with a Graduate Degree, $83,593 in spending (62.9% of total income), average of 2.6 people (1.5 income earners, 0.6 children, and 0.4 seniors)

source: Visual Capitalist

Most Firms are "Average" for Customer Experience

The Forrester Research 2019 “U.S. Customer Experience Index,” a study of customer experience for 260 brands in 16 industries, looks like a classic “Bell curve,” or standard distribution or standard deviation, where 50 percent of the distribution lies to the left of the mean and 50 percent lies to the right of the mean.

Simply put, the Forrester data suggests most firms are close to “average” in customer-reported experience. Roughly two thirds of firms are rated “okay.” About 16 percent get “good” or “poor” ratings. A very-small percentage get “excellent” or “very poor” ratings.

source: Math Planet

No executive or employee probably enjoys being “average.” Most firms tend to say their customer service, or customer satisfaction is good or excellent or at least better than most of its competitors and peers. The Forrester Research tends to confirm that customers do not see matters that way.

source: Forrester Research

U.S. ISP Capex Rose $3 Billion in 2018

U.S. service provider capital investment increased by approximately $3 billion in 2018, according to US Telecom.

USTelecom estimates that U.S. internet service providers  invested $75 billion in 2018, up from $72 billion the prior year, and up $6 billion from the 2016 low US Telecom says was the result of common carrier regulation.

source: US Telecom

“The decline in capital investment starting in 2015 and the recovery that started in 2017 suggest the likelihood of a negative regulatory impact from the 2015 utility classification of broadband providers and, conversely, a positive impact from a return to a more forward-looking policy environment in 2017,” US Telecom says.

The caveat is that “many factors affect company investment decisions, such as macroeconomic conditions, technological developments, capital costs, taxes, competitive upgrade cycles, and regulation,” US Telecom also says.

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.