What Edge Computing Roles Can Telcos Assume?

Many observers would note that telcos often have stumbled trying to enter new fields where other providers--incumbent and upstarts--also have aspirations. It already looks like competitors in the edge computing market are moving fast, which could limit the revenue upside for telcos in the broader edge computing business.

When thinking about edge computing, the names Amazon and Verizon, along with a few other tier-one connectivity providers--including Vodafone, KDDI and SKT--have recently popped up. Amazon notably will provide its Wavelengths edge computing service, while the telcos supply edge computing real estate. 

Some might be tempted to argue that this shows telcos are moving early. That is true, but it is the way telcos are participants which illustrates the revenue limits. The telcos are supplying real estate, in the form of facilities, racks, power, security, air conditioning. The more-lucrative edge computing as a service is provided by Amazon.

As logical as that is, it also points to another instance where "telcos are the dumb pipe," not the owners and suppliers of the applications using the pipe. it is far from immaterial that a new revenue stream can be created at the edge that mimics the more-established data center business. That essentially is a real estate play.

What is far less clear is whether telcos have any role beyond real estate.

Walmart, the giant U.S. retailer, now says it will build edge computing facilities available to third parties. Developments such as that show the challenges telcos will face in securing a role in edge computing. On the other hand, such hyper competition is not unique. Most big markets are susceptible to disruption. 

Much hinges on how extensive an edge computing network must be, in a metro area, to support many classes of new applications requiring low latency. If, as many telco execs now believe, only one major metro edge computing site is required, competitive entry is easier for any number of new players. 

If dispersed edge computing sites, with even lower latency are required for some use cases, then competitive entry is more difficult, and telcos may have greater prospects

It simply is not clear yet how extensive edge computing sites must be to support autonomous vehicles, for example. It may turn out that a single metro facility is sufficient to support the overwhelming percentage of new edge computing use cases.

It might also be the case that a highly-distributed network of edge computing facilities is required for some use cases. In such instances, telcos might have more advantages. But it already is clear telcos will not have the field to themselves. Nor, perhaps, is that unexpected.

When one thinks about online advertising, most of us would guess Google and Facebook are dominant in the field. We tend not to think of Amazon as a significant and fast-growing participant. Verizon and AT&T have smallish positions right now, but AT&T expects to become a bigger player as it harnesses its Warner Media content operations and assets. 

source: Statista

For example, Walmart believes it must take a greater share of advertising, in part to sustain profitability of its online commerce operations. 

Much as Amazon can pitch itself as a valuable ad venue because it knows what products people are searching for, right now, so Walmart hopes its shopper data can make it a place for advertising about related products after actual purchases have been made, for example. 

The point is that Walmart might well be competing in a number of businesses we might not have expected. As it plans to make its edge computing services available to third parties, so Walmart now expects its own logistics capabilities to be offered to third parties. 

source: Wall Street Journal

What Caused Voice, Messaging Revenue Erosion?

Most professionals in the telecom industry, if asked what key forces explain industry margin pressures and revenue shifts, will tend to include “competition” and “over the top” apps and services. 

Less frequently, one might hear that changes in end user preferences (mobility, especially) or technology (including the internet and TCP/IP, Moore’s Law, optical fiber, signal compression, wireless, cloud computing, virtualization) are key reasons for changes in revenue composition and magnitude. 

source: FCC

source: U.S. Department of Justice

Some with longer memories might say that industry deregulation and national telco privatization are contributors. And though different participants might argue about which of these forces was “most important,” all have played key roles over the last 40 years. 

There would be little competition save for deregulation and privatization. The shift to OTT would not have happened without embrace of TCP/IP and the creation of the internet. And technology would not have advanced so fast, cutting infrastructure and operating costs, except for Moore’s Law. 

Vastly lower computing and communications costs, in turn, enabled remote computing, which supported and transformed the way people and businesses use software. In a direct way, the consumer shift to “I want what I want, when I want it” propelled the value and use of mobility, creating a substitution effect. 

People found mobile the way they preferred to use voice, while messaging enabled by mobility became (with email) a substitute for the need to “talk,” in many instances. And changes in tariffs helped drive the change. 

After about 2000, consumers began to place more and more of their long distance calls directly from their mobiles, instead of landline phones, in large part because of financial inducements to do so. 

source: National Exchange Carrier Association

After 2000, all fixed network providers lost share, as demand shifted to mobility, largely because AT&T introduced its Digital One Rate plan, which eliminated the cost distinction between domestic long distance calling and a mobile phone minute of use. 

Where before a caller might have paid 10 cents a minute to 25 cents a minute to make a long distance call, after Digital One Rate the cost was simply the cost of using a mobile phone for a minute. 

source: Technology Policy Institute

And since Digital One Rate was available only on mobile phones, and, at first, only on AT&T’s mobile network, it was rational for consumers to want to make outbound long distance calls on their mobile phones, instead of using a landline phone and service. 

And even if the internet had come a “thing” by about 2000, the real reason for the precipitous fall in long distance revenue was a massive shift to use of mobile phones, not displacement by voice over IP alternatives. 

For this reason, some of us would not agree that VoIP and OTT messaging have caused most of the industry revenue losses.

Could Edge Computing Facilities Eventually Help Telcos Become More Asset Light?

The fixed network communications business never will be asset light. On the other hand, the long-term business model almost certainly benefits from becoming less asset intensive, when possible, as this helps lower sunk costs and reduces capital spending.

Edge computing raises a couple of interesting questions, in that regard. Assuming that the best option for most telcos is not to become "edge computing as a service" providers, but instead focus on becoming neutral host providers of edge computing facilities (racks, security, air conditioning, cross connect), new issues around recurring revenue, profit margins and asset creation arise.

At least in principle, edge computing colocation could be a logical line extension for many tier-one connectivity providers. The investments might be incremental, and produce additional revenue.

The other question is whether the edge facilities business could be positioned as an asset for eventual sale, as has been the case for cell towers.

Cell towers and stand-alone data center facilities were easy to separate from the rest of the connectivity business, and could be sold.

That is not so easy when edge computing racks and infrastructure are inside telco buildings and real estate, unless those facilities have been nearly entirely replaced as elements of the communications infrastructure. 

On the other hand, network virtualization could be a way for telcos to position much of their former central office infrastructure as non-core assets, though they might still need to become tenants, if most local central offices were sold. Much as they sell owned towers and then become tenants, the same could, in principle, be done with most central offices once virtualization is possible. 

At least for fixed network operations, those former CO locations would still be needed as aggregation points for the local access network. 

If an entire local access business cannot or should not be sold, the question might then be asked: how much of those physical “access” assets could be positioned for sale? Generally speaking, COs and access networks have been considered mission critical assets, with connectivity providers benefiting from ownership of those facilities. 

So there are some possible new questions. 

To what extent does edge computing infrastructure, like the data center business, create recurring revenue, and to what extent might such assets become mission critical for connectivity providers? 

Even if mission critical, could such assets be packaged for possible eventual sale, using the same sale and lease-back mechanisms previously used for cell towers? 

To the extent that edge computing is integral for connectivity service operations, to what extent could those functions be supplied as a “buy rather than build” input? 

Those could become more interesting discussions at some point, as most service providers seek to become a bit more asset light, if only to reduce the sunk costs of their businesses.

5G is About Many Things, but Consumer ARPU Really is Among Those Things

Way too much is made of near-term potential revenue gains for mobile service providers because of 5G. Keep in mind that nearly every 5G account replaces an existing 4G account.

When a 5G account generates more revenue for a mobile service provider, it might sometimes be for a mix of reasons, such a customer switching from an account with a consumption allowance to an unlimited usatge account that costs more, as often as a revenue boost coming from a higher price for 5G, compared to 4G.

So revenue impact must be evaluated on a number of perhaps indirect metrics, including better new customer acquisition, lower churn and upsell prospects, on the revenue side of the ledger. Across the industry, “flat to declining ARPUs, despite upgrading subscribers to 5G,” are the likely outcome, ABI Research predicts. 

There are other benefits, however, on the cost side of the ledger. Mobile operators must supply ever-increasing amounts of capacity across the whole network, but also most immediately at perhaps 20 percent of cell locations. 5G provides a more-efficient way of supplying lots of new capacity at a lower cost per bit than 4G, even when 4G capacity continues to improve, up to a point.

Some might therefore conclude that the whole 5G project is some sort of mistake. 

“In the most advanced 5G market, South Korea, 5G has managed to stop the declining ARPU trend, but it is now clear that it cannot generate new consumer revenue” ABI Research notes. 

New technology sometimes is important most crucially for suppliers, when they can reduce the underlying cost of consumer products supplier sell to consumers, while improving performance characteristics. That is not to underestimate the longer term value of new technology in enabling new products and better end user experience. 

It is to note that 5G is important right away because it allows suppliers to position themselves for ever-increasing customer expectations, and not because dramatically-new and different experiences are the result of deployment. That will come, simply not at first. 

In consumer markets, at first, the value of 5G accrues mostly to service providers, who can use 5G to alleviate congestion on urban cell sites. Only later will additional applications, use cases and end user experience benefits be created. 

The new use cases are virtually universally expected to come in the enterprise customer segments of the business. But many might disagree with the assertion that 5G success in enterprise verticals will be determined in 2020. 

To be sure, ABI Research believes 2020 will be crucial because Release 16 from the 3GPP will be released in 2020. But that speaks only to standards, not commercial application. It is true that mass deployment awaits the finalized standard, as suppliers will be able to build actual products compliant with the standard. 

But many could argue that almost nothing about the future success of 5G in enterprise verticals can be determined in 2020, since long-term value will require parallel developments in edge computing, applied artificial intelligence and broad developments in the internet of things, in addition to finalized standards that allow suppliers to build actual products. 

ABI Research also says “private cellular will threaten the domain of mobile operators,” a contention that seems both plausible in some ways and yet nuanced. To be sure, mobile service always has promised connectivity “wherever” a customer is, indoors and outside. But the reality is that the enduring value of mobility continues to reside in outdoor spaces. 

Most mobile customers are quite used to switching their mobile device internet connectivity to Wi-Fi when indoors. So the unique value of a mobile network remains outdoors coverage. Private networks often are a primary, perhaps exclusive domain for indoor mobility, often for public network voice, messaging and internet access.

In that sense, private indoor 5G networks are akin to private local area networks long used to support PC and premises networks, using cables in the 1980s and now Wi-Fi. We might well consider private 5G to be a similar sort of development, in which case private 5G networks are complementary to public wide area 5G and mobility, not a replacement or substitute. 

In some cases enterprises might use private 5G where they once used private Wi-Fi or cabled networks. In other cases private 5G will simply allow users mobile device connectivity indoors. 

Even if one assumes some use cases where private 5G is a substitute for public network 5G, as when sensor connections do not rely on mobile accounts but are relayed over a private network to a public network WAN connection, it is unclear whether that subtracts from a mobile network operator’s revenue potential. 

Public networks always have terminated at a demarcation point at the side of a house or building. Inside the building long has been the domain for private networks, the salient exception being indoor mobile phone reception. 

And even there, a case can be made that offloading the cost of mobile access to private 5G provides capex and operations savings that have a non-zero value for mobile operators, offsetting some potential non-zero account “losses.” 

The point is that 5G does not necessarily have to drive near-term consumer revenue upside. Nor does private indoor coverage necessarily diminish in any way diminish the value of mobile service. 

The value of private 5G for a mobile service provider includes the total cost of ownership. Capital investment and operating cost savings provide value even if some amount of account substitution could occur in some instances. 

So private 5G might not prove an unwelcome trend for mobile service providers.

5G Demand is Real....for Suppliers

“I don’t feel the difference,” says one South Korean user of 5G services. That is not to say there are no use cases for consumer 5G. Another user “notices a difference on the superfast network only when downloading files or images on his phone,” according to a Wall Street Journal report. 

But that already seems to be one huge difference between 4G and 5G user experience: 4G provided a noticeable improvement in experience, compared to 3G. Whether the use cases was simple web surfing or entertainment video, 4G was experientially better than 3G. 

People used to switch to public Wi-Fi, when possible, because Wi-Fi provided a better experience than 3G. In many cases, that now is reversed, and the mobile network provides a better experience. Most users still rely on Wi-Fi when indoors, sometimes to reduce mobile data consumption, sometimes for performance reasons, sometimes for reasons of coverage (the Wi-Fi signal is stronger than the mobile signal). 

Though 5G will generally be faster than 4G, the experiential benefits may not--with the exception of downloading--actually be detectable. That poses a different adoption challenge than did 4G. Where 4G offered a difference users could see, that will not generally be the case for 5G, simply because the applications people use will not benefit from the higher 5G speeds. 

So adoption might well be driven by other sources of value, including new devices people want that happen to use 5G; service plan inducements mobile providers will introduce (higher or unlimited usage, for example); prestige in some cases. 

On the supplier side, 5G will immediately provide a way to supply additional bandwidth in urban areas where consumers complain about congestion and slow speeds. In other words, 5G is supplier push rather than consumer pull in a direct sense, allowing mobile operators to meet surging data demand and quality of experience expectations, more than any obvious new use cases. 

source: Ericsson

Netflix recommends minimum internet access speed of 25 Mbps per stream for viewing 4K video, 5 Mbps for high-definition video. But it also is questionable whether 4K viewed on a smartphone offers resolution a user can actually detect. In other words, 4K is probably not detectable by the human eye. 

Virtual reality is the use case where 5G might really matter, but few such use cases are yet common on smartphones. 

You might ask “what is the point?” Eventually, 5G will prove its value, if for no other reason than allowing service providers to supply the bandwidth customers want at prices they are willing to pay. 

source: Ericsson

Eventually, other developments, ranging from edge computing to virtual and augmented reality, plus internet of things, eventually will make 5G more compelling, creating use cases and revenue models for device, app and service providers. 

Still, for the moment, consumer value will be limited to downloading speed.

Ireland Market: Revenue Down, Broadband and Mobile Subscriptions Up

Just in case you needed one more data point, in Ireland communication costs have dropped, while the consumer price index has climbed, since 2017. Meanwhile, total revenue has dropped, fixed line revenue has dropped more, while mobile revenue has climbed. 

source: ComReg

Ireland’s story will be familiar to many of you: use of voice has declined, while broadband subscriptions are up, fixed voice subscriptions down while mobile subscriptions have increased. 

source: ComReg

4G and 5G Comparisons are Not Always "Apples to Apples"

There are always some test results one cannot readily explain. And that often happens when testers do not have the ability to create full "apples to apples" comparisons. Consider comparisons of 4G and 5G speeds.

5G is supposed to be faster than 4G. Higher-frequency channels should deliver faster speeds than lower-frequency channels. 

Also, in principle, spectral efficiency should be higher when channels are wider or larger, at least in part because less bandwidth is “wasted” on guard bands. Larger channels, with fewer guard bands, should produce higher efficiency.

That might be the case for a test of 2.6-GHz 5G spectrum on Sprint’s network in Chicago, which found 2.6-GHz spectral efficiency greater than on millimeter wave spectrum. 

“Based on RB-normalized throughput and MCS allocations, the Band 41 spectral efficiency was at least 50% higher than 5G millimeter wave for most test scenarios in Chicago when compared with testing did in New York City late this summer,” according to a study of Sprint’s network.

source: T-Mobile US

But there are notable elements of the test that likely account for the finding that 2.6-GHz efficiency was higher than that of millimeter wave networks. The Chicago test used some form of carrier aggregation, where both the 2.6-GHz 5G channels and also 4G LTE bandwidth could be used by the phones tested. 

In principle, that means the effective 5G bandwidth theoretically could use 120 MHz of spectrum across the 4G and 5G networks. It seems likely that the millimeter tests used channels of less than 120 MHz, since 5G channels can range from 5 MHz up to 100 MHz, 

Of course, radio technology also matters, as is the case with different flavors of MIMO (multiple-input, multiple output) radios. It also seems very likely that the Chicago tests used commercially-available phones, while the millimeter wave tests used modems, not phones. Those test elements might have affected results. 

But the key explanation most likely includes channel width as the explanation.

Service Provider Strategy Hinges on Managing Product Life Cycles

Tier-one connectivity provider business strategy hinges on product life cycles, and the effort to create replacement products as legacy products are harvested. Key examples include the harvesting of fixed network voice and promotion of mobility as a substitute product; the waning of long distance calling revenues and its replacement by a combination of mobility and messaging revenues; the harvesting of voice in general and its replacement by internet access. 

Entry into linear video services is a growth strategy for some service providers, while others are harvesting linear services while building over the top replacements. 

source: Consult

Investment is required before a product is launched. In the telecom industry, this includes standards work, product development by infrastructure suppliers, some amount of lobbying work with government or regulatory entities and then marketing and capital investment. 

There is a predictable corollary to these initiatives. Work on the next generation of products has to be underway before the legacy revenue driver is exhausted. 

source: Plexius Group

In the early days, as with most big new product launches, building brand awareness and gaining market share are key, while profit margins often are less important. Once a product is mature, though, strategy shifts to defending market share and increasing profit margins. 

source: Parcus Group

In product decline phase, revenue has to be harvested, assets divested or operations halted. 

One big question might be “what comes after mobility?” Another question could be “what comes after internet access?” Other questions could be asked about what comes after entertainment video. Not all service providers, in all markets, will have to create answers for these questions immediately. 

But some must grapple with the issues now. In some markets, voice, internet access, messaging, linear video entertainment and even core business customer services are either mature, or facing product substitution, or both. 

Globally, telecom service provider revenue growth rates are about one percent, STL Partners estimates. 

Mobile voice revenue, for example, might fall from $380 billion in 2019 to $210 billion in 2024, at least in part because of  increasing usage of over-the-top apps, including WhatsApp and Viber, says Juniper Research. 

The big point is that connectivity providers must continue to search for new revenue drivers beyond voice, mobility, internet access and entertainment video.

Ridesharing and Mobility Have been Disruptive Attacks on Markets

Ridesharing represents what many consider disruptive competition, and there is some evidence for that outcome. Welcome to the world telecom providers and internet service providers live in. 

At Los Angeles International Airport,  shared van rides plunged by 66 percent in the first half of 2019 compared with the first half of 2016, the first full year that Uber and Lyft operated there, according to city data. 

Trips on FlyAway buses also sank by 66 percent over the same period, while taxi trips fell 39 percent. Use of courtesy shuttles to car rental facilities, parking lots and hotels saw a 20 percent decline. The number of Uber and Lyft trips more than doubled in the same time period. 

Many would agree that mobile phone service has been disruptive for fixed network voice services, even more so than VoiP or messaging. mobile surpassed fixed subscriptions globally in 2002, the International Telecommunications Union says. 

In the U.S. market, for example, consumer spending on fixed network voice dropped from about 45 percent of “telephone” spending in 2007 to less than 20 percent by 2017. Mobility spending conversely grew from about 55 percent in 2007 to more than 80 percent by 2017. 

U.S. Bureau of Labor Statistics

Some estimate average spending by U.S. families of about $40 to $60 per user, per month, an amount that almost does not register as a percentage of total household spending. In Europe, communications spending altogether is about 2.4 percent of household spending. U.S. households might spend two percent of total on communications. 

In fact, communications spending represents a small enough category that the U.S. Bureau of Labor Statistics does not track it.  

In Canada, in just one year between 2015 and 2016, fixed line voice spending fell nine percent, while mobile spending was up six percent, for example. 

source: Canadian Radio-television and Telecommunications Commission