Catching Inflection Points Can be Really Important

People tend to think in a linear way: tomorrow will be like today, just differing in small ways. Most of the time, that is a reasonable supposition. Unless it is not. 

The shift from monopoly to competition; the replacement of fixed network services by mobile; analog to digital infrastructure; embedded to virtual; closed networks to open; owned to rented computing and rate-of-return to competitive dynamics provide good examples of non-linear phenomena in the global telecom business. 

Exponential change at power law rates are hard to grasp, at first. Inflection points happen, when slow-changing trends suddenly go non-linear. The practical business implication is that being out of position when the inflection point happens can be unrecoverable.

source: Math is Fun

Once an inflection point happens, a firm or industry can miss a dramatic upturn in demand, ceding leadership to others. Conversely, when an existing product hits a negative inflection point, sales and profit can vanish suddenly. 

It will seem quite odd indeed, but back in the 1980s the best minds in the telecom industry could not figure out how we were ever going to provide voice service to most consumers in developing nations. Mobility changed that rapidly, in the 1990s. 

source: ITU

Many of us thought of voice service as a product with highly-inelastic demand, not a product with a lifecycle. Likewise, the telecom business was closed, not open to third parties. Only telcos could program the network. With the internet, no programming is necessary. Given dumb pipe access, service and app creation is independent of the network. 

Many products were expensive, physical and difficult to supply at lower costs. Now many products are capable of almost-infinite replication at very-low costs. Distributors used to be essential to move those products to customers. Now distribution often can go direct to consumer or end user. 

1980	2020
Natural monopoly	Oligopoly
High margin	Moderate to low margin
Low to moderate adoption	High adoption
Low innovation	High innovation
Stable markets	Unstable markets
Compete on quality	Compete on price
Fixed network dominates	Mobile network dominates
Tightly integrated apps and network	Open network
Owned app creation	3rd-party app creation
Sell app, use network access	Sell network access (dumb pipe)
Voice business model	Internet access, mobile business model
Similar business models globally	Growing diversity of business models
99.999% uptime	99.9% or “good enough” availability
Few lead apps	Many lead apps
IT adoption: enterprise; SMB; consumer	IT adoption: consumer/SMB to enterprise

source: IP Carrier

Such basic questions as “who can be in our business?” now are open and indeterminate. Where every telco basically offered the same products in the monopoly era, strategies now diverge. And where competition once was based on quality, most often it is based on cost, with acceptable levels of quality. 

The global telecom industry, in other words, has developed in a non-linear way. That means we often struggle to keep up. 

Even if We Had Zero FCC Data, We Could Estimate Coverage, Take Rates and Quality of Experience

If Federal Communications Commission internet access data were unavailable at all, could we still make educated assessments of broadband coverage, make reasonable estimates of take rates and understand where the shortcomings exist? Of course we could. 

More granular data arguably always is better, but it is mistaken to make a fetish out of FCC data collection. In a filing to the U.S. Federal Communications Commission, Incompass calls for better data collection about internet access, as virtually everybody agrees would be a good idea. 

But we can gain valuable insight into the state of fixed network internet access coverage, usage and performance in many other ways, using what we know about housing stock, occupancy of housing, account data reported by ISPs and surveys of the amount of substitution occurring, where people deliberately choose not to buy fixed network services (or linear video, voice or any other product). 

There are two big and different issues: how well internet service providers perform at supplying access, and how consumers respond to that availability. Take rates alone are not evidence of supply gaps, but often reflect consumer choices, for example. 

Incompass cites Pew Research surveys that  found that 17 percent  of U.S. adults are smartphone-only internet users, meaning that they do not have a traditional high-speed internet connection at home. Using the nationwide average of 2.5 persons per living unit, that suggests seven percent of U.S. homes are “mobile only” for internet access. 

Vacancy rates also matter, as an unoccupied  living unit will not generally be a candidate for purchasing of internet  access. No all living units are occupied at any given time. Vacancy rates can range from more than one percent for owned housing and up to seven percent for rental units. 

Owner-occupied housing units made up 57.9 percent of total housing units, while renter-occupied units made up 30.7 percent of the inventory in the first quarter 2020, according to Census Bureau data. Vacant year round units represented 8.8 percent of total housing units, while 2.6 percent were vacant for seasonal use. 

Approximately 2.2 percent of the total units were vacant for rent, 0.7 percent were vacant for sale only and 0.6 percent were rented or sold but not yet occupied. Vacant units that were held off market comprised 5.3 percent of the total housing stock – 1.5 percent were for occasional use, 1.0 percent were temporarily occupied by persons with usual residence elsewhere (URE) and 2.9 percent were vacant for a variety of other reasons.

Add it all up and 88.6 percent of the housing units in the United States in the first quarter of 2020 were occupied and 11.4 percent were vacant, according to the U.S. Census Bureau.

The Census Bureau also estimates total housing units at 140 million. That implies a potential buyer base of about 124 million units. 

If we deduct the “mobile-only” households (seven percent, or 8.7 million homes, that implies a potential buyer base of about 115 million locations. But not everyone actually uses the internet, which further reduces the addressable base of buyers. 

Though internet usage is virtually universal for adults below the age of 50, only 73 percent of adults over 65 use the internet. About 88 percent of people 50 to 64 use the internet. 

Eventually, adult usage will be virtually universal, but at the moment some percentage of homes might not buy internet access because they do not use the internet. About 15 percent of the U.S. population presently is 65 or older; about 13 percent are in the 50 to 64 age range. 

There are about 34 million households headed by someone 65 or older and perhaps 35 million households headed by someone age 50 to 64. That suggests a potential nine million non-internet homes headed by someone 65 or older, plus four million homes headed by someone 50 to 64. That suggests as many as 13 million households without a need for internet access. 

Subtracting those homes from the base of 115 million potential buyers give us a potential buyer base of 102  million homes. 

Since fixed internet access is sold to locations, not people, all we have to do is compare the current number of fixed network internet access subscriptions with that potential buyer base of 102 million homes to derive an estimate of adoption (take rates). 

Leichtman Research says there were a total of 101 million U.S. internet access accounts held by firms representing 85 percent of the customer base. That suggests total fixed network accounts at 119 million. Granted, some percentage of those accounts are sold to businesses, especially small businesses. 

There are about 30 million U.S. small businesses.  About half of all small businesses are home based and presumably use home internet. So small business probably represents an addressable opportunity of 15 million locations. 

Add that to the consumer addressable opportunity and the universe might be 117 million locations. That is less than the number of accounts already in service. 

That is not a direct measure of quality of experience or speed, but does suggest that most customers who want to buy fixed network internet already do so, whether small businesses or consumers. And there also are ways to assess quality of experience. But that is another exercise and post.

Will the Digital Divide Always Exist? Will it Matter?

To get funding, any advocacy group must first demonstrate that a problem exists. To keep getting funds, an entity has to insist no progress is being made, necessitating continued funding. And if the original problem actually is solved, the entity has to find some new problem that needs to be solved. 

All that applies to “broadband access,” no less than any other undertaking we might consider worthwhile. Despite much data indicating that internet access (mobile and fixed) is getting substantially better and has held up very well as nationwide stay-at-home policies were put into place because of the Covid pandemic, not every community has been so fortunate. 

Oxnard, Calif., for example, was one such place, seeing a dip in downstream speeds of about 20 percent from mid-March to mid-April, although performance now is moving back up post-mid-April, according to BroadbandNow, using test data from M-Lab. 

The community where I live experienced a 32 percent dip in downstream speed during the same period. Those are the stats. 

What I can say in my own case is that the dip in top speed happened on a connection that normally runs (depending on hour of the weekday) between 130 Mbps and 200 Mbps. The dip was brief, lasting perhaps a week, and did not cause any actual degradation of user experience.

The point is that statistics are one thing; user experience can be quite another matter. The median pre-Covid speed was described as between 75 Mbps and 93 Mbps (half faster, half slower). 

Multi-user households buying lower-speed services might have experienced issues. That was not my own experience, but differences, gaps and disparities exist, and might continue to exist in the future, for all sorts of reasons. 

Consumers make choices. They might decide to buy more-affordable services that can be stressed in multi-user households. Some, in single-user households, might decide to rely on mobile access only. None of that is necessarily a failure of policy, but an expression of consumer choices, or demand. 

Supply is an issue, though. In many communities, though served by gigabit cable networks, telcos still sell digital subscriber line services that are demonstrably slower. 

Still, one analysis by Fastly suggests that even the most-challenged digital subscriber line networks in the United States held up under the new at-home load. Cable TV networks also have held up well.

source: Fastly

According to Ookla, U.S. internet access speeds  on fixed networks dipped about four percent during the pandemic. Mobile speeds actually improved by one percent. 

Most of you are familiar with speed tests. Most of you also know you test your connections primarily when they seem “slow.” Almost nobody bothers to test when the networks are humming along. 

And M-Lab tests have increased significantly during the stay-at-home policies, suggesting customers are aware of greater congestion or slower experienced speeds. 

That would hardly be surprising, as all studies show at-home internet access data volume has grown 40 percent or so as people have been forced to work and learn at home. 

A study by Fastly also indicates speed and income are related. That should not be surprising. Lots of consumer behaviors and spending patterns are correlated with income, education, wealth and geography. Up to 20 percent of U.S. consumers also say they rely on mobile internet access, and do not buy fixed network access. Rural speeds tend to be slower than urban speeds. Rural use of the internet, PC ownership and income also seem to be lower than in urban areas. 

The point is that there always will be room to argue that a digital divide continues to exist, even if it is narrowing and has been narrowing for a couple of decades. And statistics often too-casually dismiss the many nuances as speeds are improving fast. 

But differences might always exist.  Since networks are expensive, the last two percent of locations will always be an economic issue. We might solve the basic speed issue, improving delivery from 10 Mbps to 25 Mbps to some higher figure. But urban networks will keep improving as well, so a gap might always exist.

Some Problems Do Not Go Away, Even if They Become Less Important

To get funding, any advocacy group must first demonstrate that a problem exists. To keep getting funds, an entity has to insist no progress is being made, necessitating continued funding. And if the original problem actually is solved, the entity has to find some new problem that needs to be solved. 

All that applies to “broadband access,” no less than any other undertaking. Despite much data indicating that internet access (mobile and fixed). One analysis by Fastly suggests that even the most-challenged digital subscriber line networks in the United States held up under the new at-home load. Cable TV networks also have held up well.

According to Ookla, U.S. internet access speeds  on fixed networks dipped about four percent during the pandemic. Mobile speeds actually improved by one percent. 

)has held up very well as nationwide stay-at-home policies were put into place because of the Covid pandemic, not every community was so fortunate. Oxnard, Calif., for example, was one such place, seeing a dip in downstream speeds of about 20 percent from mid-March to mid-April, although performance now is moving back up post-mid-April, according to BroadbandNow, using test data from M-Lab. 

Most of you are familiar with speed tests. Most of you also know you test your connections primarily when they seem “slow.” Almost nobody bothers to test when the networks are humming along. And M-Lab tests have increased significantly during the stay-at-home policies, suggesting customers are aware of greater congestion or slower experienced speeds. That would hardly be surprising, as all studies show at-home internet access data volume has grown 40 percent or so as people have been forced to work and learn at home. 

A study by Fastly indicates speed and income are related. That should not be surprising. Lots of consumer behaviors and spending patterns are correlated with income, education, wealth and geography. Up to 20 percent of U.S. consumers also say they rely on mobile internet access, and do not buy fixed network access. Rural speeds tend to be slower than urban speeds. Rural use of the internet, PC ownership and income also seem to be lower than in urban areas. 

The point is that there always will be room to argue that a digital divide continues to exist, even if it is narrowing and has been narrowing for a couple of decades. And statistics often too-casually dismiss the many nuances as speeds are improving fast. 

But differences might always exist.  Since networks are expensive, the last two percent of locations will always be an economic issue.

Where are 5G Partnerships Possible?

A new report produced by the Massachusetts Institute of Technology Technology Review and sponsored by Ericsson argues that connectivity providers do not possess the vertical market domain knowledge to create new services for autonomous vehicle fleets, internet of things and management of fully-automated factories.

That obviously is true, but does illustrate one important fact: connectivity providers now exist in an internet ecosystem where the expected and normal course of development is for third parties to create the apps that require connectivity. 

Consider the way Verizon sees 5G currencies. All relate to the network and its performance. In a closed environment, that might confer lots of advantage. In an open internet ecosystem, not so much, as app providers can use the network without any formal business arrangement. That limits the value the connectivity provider can extract from any service, application or company that requires the network to supply value. 

source: Verizon

“There is a growing understanding that operators cannot do it alone, and that an innovative ecosystem of partners will be crucial to future success, the report argues. To be sure, it is doubtful telco executives ever believed, over the last few decades, that they actually could create compelling consumer or business applications on their own, beyond voice and messaging. 

 “Executives interviewed for this report state that getting the full value of 5G is not something they can do on their own,” the authors say. That sounds simple enough, but has proven to be nettlesome. 

When the basic architecture of the network is that app providers do not need telco permission to operate and make their services available, it never is so clear what value a partnership with a telco actually provides. Generally speaking, the closer a third party is to the core “connectivity” function, the greater the value of the connectivity partner. Consider Alphabet’s Loon, the high altitude balloon-based internet access platform. 

Loon arguably is an infrastructure supplier for mobile operators, allowing them to use “cell phones in the stratosphere” to provide the same sorts of connectivity terrestrial cell towers provide. The partnership is that Loon’s customers include mobile operators, Loon acting essentially as an independent cell tower company, providing facilities to mobile operators. Mobile operators, in turn, are anchor customers for Loon. 

In other cases, as for edge computing, connectivity providers provide real estate services to edge computing firms, renting rack space, supplying energy, cooling, security and connectivity. 

The point is that partnerships between app and service providers and connectivity providers will require some thought. Opportunities will be greatest when the connectivity provider is a situationally key customer or a key supplier.  Very few firms are direct users of  cell towers on the ground or in the sky, and direct customers. Mobile operators are such key customers for Loon. 

Relatively few firms require edge computing real estate in a direct sense. Connectivity providers supply such real estate to cloud computing giants. 

But you see the pattern: such partnerships make sense for infrastructure. Apps and services beyond connectivity are not so obvious. 

How Big is Unified Communications as a Service Business?

It always is difficult to say with certainty how big a market unified communications represents. It is a mix of enterprise hardware and software (room videoconferencing systems, phone systems, for example) plus software and managed services (unified communications as a service), access services (SIP, for example), consulting and maintenance contracts. By some estimates, the global market in 2020 is about $12 billion. 

source: GM Insights

Others believe the the unified communications as a service (UCaaS) market alone represented about $16 billion in annual revenues in 2019. 

source: Markets and Markets

By other estimates, is $39 billion or $40 billion in annual revenues, or as much as $56 billion. Such forecasts rely on high rates of growth. 

Gartner estimated North America UCaaS spending having growth rates of 20 percent in 2019, for example, representing sales of about $2.1 billion. 

source: Gartner

Such figures explain why unified communications, either premises-based or delivered as a managed service, has been the province of specialists (integrators, interconnect companies, VoIP specialists, PBX suppliers). The market is too small to be of major interest to a tier-one service provider. 

At least in the U.S. market, any opportunity representing less than $1 billion in sales for any single firm is too small to chase.

Telcos and OTT Streaming Partnerships?

Amnesia? Not Really

Sometimes it seems as though we suffer from historical amnesia. We cannot seem to recall the lessons of something we have lived through before. Actually, that might not be the case. As data from Silicon Valley Bank shows, “we” have not actually lived through something before. 

Its latest market report shows that 61 percent of active venture capital firms have never experienced a recession. Just 23 percent of firms have weathered two recessions (the internet bubble and the Great Recession of 2008). About 16 percent experienced the Great Recession only.

In other words, it often is literally the case that industry participants actually have no memory of something because they were not in business at the time or were not in a position to make decisions at the time. 

So it is not actually true that active industry participants today actually have seen or lived through some events that are part of historical memory for others. It is not historical amnesia: it is youth. 

source: Silicon Valley Bank

Where are All the Unserved U.S. Households?

Since the “digital divide” is closing everywhere in the world, it simply stands to reason that the divide ought to be narrowing in the United States as well. That is not to say the divide closes completely, only that clear and steady progress is being made to supply better internet access to citizens who wish to buy it. 

The Federal Communications Commission says “the number of Americans lacking access to fixed terrestrial broadband service at 25/3 Mbps continues to decline, going down by more than 14 percent in 2018 and more than 30 percent between 2016 and 2018.” 

The FCC also notes that the number of Americans without access to 4G Long Term Evolution (LTE) mobile broadband with a median speed of 10/3 Mbps fell approximately 54 percent between 2017 and 2018.

Also, more than 85 percent of U.S. residents now have access (can buy) fixed terrestrial broadband service at 250/25 Mbps, a 47 percent increase since 2017. Over the same period, the number of Americans living in rural areas with access to such service increased by 85 percent, the FCC says. 

 Inevitably, some will lament the existence of differences; decrying a lack of perfection or simply arguing that the numbers are incorrect, arguing that the number of people without broadband access is 42 million or even as high as 162 million. 

It is not clear where those higher figures come from. Looking at connected households is revealing, however. 

The Federal Reserve estimates there are about 140 million housing units., defined as “a house, an apartment, a group of rooms, or a single room occupied or intended for occupancy as separate living quarters.” 

To be more precise, we also would have to account for households that either choose not to buy, or cannot easily buy. Some of those latter cases might be boats that serve as a residence, trailers or rooms rented inside homes where the resident does not buy internet access because the owner or manager of the property supplies the access. 

More than 16 million units are vacant at any particular time, leaving a total of perhaps 124 million units, which accords well with the estimate of 121.6 million households we get if we assume the U.S. population is 304 million persons, with an average household size of 2.5. Then there are 121.6 million households. 

That is the base of total locations fixed networks must reach. But a significant number of households choose not to buy fixed network access. 

Somewhere between 15 percent and 20 percent of U.S. homes are “mobile-only” for internet access, which might represent as much between 18 million and 24 million households. Those customers choose not to buy fixed network internet access, for whatever reason they choose. 

If so, then the number of locations who might buy fixed network internet access is on the order of 97.6 million to 103.6 million sites. 

If take rates for all homes (including the vacant units) are about 80 percent, then we would expect total fixed network accounts to number about 97.3 million locations.

Leichtman Research Group estimates that the largest U.S. telcos and cable companies have about 101.2 million accounts, but that includes business accounts. That matches fairly well the estimate that total fixed network accounts should be about 97.3 million in number. 

The point is that there are very few U.S. locations that do not already buy some form of internet access--mobile or fixed or both. That is difficult to square with claims that huge numbers of peop;le literally cannot buy service at 25 Mbps. 

Consider also that internet access routinely is available from satellite and other wireless and mobile platforms. 

Satellite broadband and fixed wireless operators traditionally have targeted rural homes and small businesses as their primary market, in the past said to include as many as 35 million locations. But estimates vary widely. Some say 80 million people live in rural areas, others say 46 million do, using the U.S. Census Bureau methodology. 

 Satellite broadband providers seem to have three million subscriptions, though some estimates (wrong, in my opinion) suggest that  6.76 percent of U.S. internet subscriptions are provided by satellite. 

Assume there are 139 million U.S. housing units, the high estimate, without adjusting for vacant units or other locations that cannot be wired. That implies nine million U.S. satellite broadband subscribers. No estimate I have seen--ever--suggests there really are nine million U.S. satellite broadband accounts. 

HughesNet believes 18 million homes are its market opportunity. Rental units alone might represent 6.6 million units, although not locations, as some of those units are in multi-family complexes. 

According to Urban.org, 13 million homes are owned by rural residents. Those figures roughly accord with HughesNet estimates of market opportunity. 

A more conservative estimate is that perhaps two percent to three percent of U.S. homes are the primary target for satellite broadband. That would include the most-isolated areas, where there are no terrestrial fixed networks using cabling. In many rural areas that are slightly more dense, wireless ISPs already operate. And, of course, there are many parts of rural areas served by cable operators or telcos. 

The point is that many homes already can buy 25 Mbps service, albeit from a satellite provider. 

A big issue is the presence of fixed wireless ISPs. According to Broadband Now, some 148.4 million U.S. residents are covered by fixed wireless ISPs. Assume an average household size of 2.5. That implies some 59 million rural locations already are reached by fixed wireless ISPs. 

Add all that up and some of us cannot fathom how 42 million to 162 million people actually are not able to buy 25 Mbps internet access.