What 5G Might--and Might Not--Do to Boost Connectivity Revenue

Paradoxically, some apparently-contradictory statements can all be true. It is argued that “5G will not lift average revenue per user” and also that ARPU will climb. Some argue the revenue lift from 5G will be slight; yet others believe consumer revenue will climb. 

That belief is based on slow global revenue growth--despite faster growth in some regions--of about one percent a year, overall. Indeed, some believe global connectivity revenue is near a peak. 

Strategy Analytics, for example, predicts that “wireless service revenue will peak in 2021 at US$881 billion, just three percent above the level forecast for 2018.” 

Observers believe that 5G mostly displaces 4G, so most “5G” revenue cannibalizes 4G. But 5G also will create new consumer revenue streams. 

source: STL Partners 

Some argue 5G revenue will come from new enterprise use cases, and at the same time that consumer revenue still will drive the bulk of revenues. 

All of these apparently-contradictory views can be true, simultaneously. Perhaps it will prove generally true that use of 5G networks will not materially boost consumer mobility revenue. On the other hand, other packaging practices--such as offering 5G only on the most-expensive, unlimited access plans--will boost revenue. 

In other words, revenue is greater because consumers move to higher-priced plans that include 5G. The direct driver is unlimited usage and other features (including 5G) that come along with such plans.

As has been true for all prior mobile generations, 5G will replace 4G. On a one-for-one basis, resulting in little net revenue change. Still, 5G likely will create some new use cases--with revenue-- around use of virtual reality or augmented reality apps, use of internet of things for home security or in the form of 5G-optimized content services. 

In many cases, new access charges might be bundled with the cost of the service or app, or revenue is generated by software as a service or other recurring charges. 

And though a majority of total 5G connectivity revenue will come from consumer mobile phone accounts, new use cases are likely to come from enterprise or business-to-business use cases. T-Mobile is introducing new mobile-based business phone services, for example.

AT&T and Verizon supply connected car services. Comcast offers home security that uses connected sensors. 

And most observers believe there is revenue upside for connectivity providers in supporting private 4G and private 5G networks, for example, from system design, integration or operation or additional direct connectivity services. 

source: Mobile Experts 

Will Post-Covid Behavior Create Consumer Revenue Upside?

Most observers would agree that long-standing consumer habits—more money spent on services, greater digital adoption, and more time and money spent out of the home—have been interrupted, accelerated, or reversed during the Covid-19 pandemic. 

There likely is less agreement on the permanency of those changes. The question for connectivity providers is whether there are direct implications for revenue streams, if any. One might argue that the simple fact that data consumption grows 40 percent each year drives revenue upside. It does not.

Higher consumer data usage tends to drive capital expenditure, as networks must continually be upgraded, but consumer spending is quite resistant to upside changes. In the mobile or fixed business, average revenue per user grows over time only as users buy more-expensive usage plans. And such changes are relatively slow-moving and slight in magnitude.

In fact, the real cost of broadband and communications has--in many cases--dropped over the past two decades. Upside arguably exists for owners of content streaming services and possibly some connectivity providers who also are partners in healthcare delivery services using connected consumer devices, especially when using new dedicated access accounts (internet of things access, for example). 

McKinsey consultants have argued, for example, that e-grocery shopping, virtual healthcare visits, and home nesting were likely to stick while remote learning, declining leisure air travel, and decreasing live entertainment would likely revert closer to pre-pandemic patterns.”

source: McKinsey

Orchestrator or Platform?

Rather than the term platform, which implies that a company creates an orchestration role or marketplace, systems of delivery might be a better way of explaining a path forward for connectivity providers trying to supply more value for their customers and create new roles within the value chain. 

In the enterprise software as a service space, some argue for approaches that are more agile because something akin to an operating system can be envisioned: a way of breaking down silos and allowing horizontal integration. 

The problem is either too much integration (too “tight” and therefore not flexible) or too loose (little to no effective integration). Think of the way application programming interfaces are used to allow systems to work together, in a more loosely-coupled manner. 

The analogy for connectivity providers is to become something of a process orchestrator, integrating various functions on behalf of a customer. The older model of system integrator comes to mind, but in the context of orchestrating the use of resources, more than creating the resources. 

Creating a system of delivery arguably is far easier than creating a platform. One arguably sees this in the software as a service business. “SaaS is upping its game with a growing number of vendors downplaying 'best of breed' and talking instead of a 'rising tide' where they become centralizing hubs in which an ecosystem of other apps are operationalized,” notes S&P Global. 

source: 451 Research 

That sounds akin to “platform,” but might be better characterized as “orchestration.” Agility and alignment arguably are parts of it. Integration might arguably be part of it. Overcoming silos is part of the idea. 

The key observation is that almost every effort made by connectivity firms to increase value for customers will require some orchestration of value to create a solution. Though not easy, it is perhaps easier to envision a large connectivity provider becoming an orchestrator of value than becoming a true platform.

Fixed Wireless Could Reverse a 20-Year Trend

Cable operators and many observers say they do not believe fixed wireless is a threat in the home broadband market. The argument is that speeds will not match what hybrid fiber coax or fiber to the home is capable of; usage allowances will not match that of cabled networks and price discounts will not be significant enough to attract switchers. 

T-Mobile and Verizon are enthusiastic for perhaps equally-compelling reasons: $195 billion worth of annual revenue. Comcast and Charter Communications alone book $150 billion annually from internet access services that largely are generated by home broadband customers. 

But even most business accounts could be candidates for fixed wireless, including smaller businesses as well as larger entities using fixed wireless as a backup service. 

source: S&P Global 

Beyond all that, fixed wireless is interesting for attackers in the home broadband market, simply because the easiest possible business model is “same service, lower price” in a market with proven demand characteristics. And the “lower price” part of the value proposition is powerfully enhanced by fixed wireless.

Fixed wireless does not have to compete with the high-end FTTH or cable gigabit services. As history has shown, most competitive attacks in software or communications happen at the low end: a product that is “not as good as that provided by the leaders, but still useful.” 

Fixed wireless only has to shift a bit of market share to become a significant revenue driver for T-Mobile, and allow Verizon and AT&T to reverse a 20-year loss of market share to cable operators in the home broadband business. 

And since at least half of all U.S. home broadband customers buy services operating in the 100 Mbps to 200 Mbps range, a fixed wireless service only has to provide about that level of performance, with adequate usage allowances and a lower price, to be competitive. 

Most likely, the center of gravity of demand for 5G fixed wireless is households In the U.S. market who will not buy speeds above 300 Mbps, or pay much more than $50 a month, at least in the early going. The reason is that that pricing level and downstream bandwidth fits the profile of 5G fixed wireless using mid-band spectrum.

The other issues are coverage and infrastructure cost. T-Mobile has had zero market share in home broadband because it is not in the fixed networks business. Verizon has a small geographic footprint and has never been able to compete in 80 percent of the U.S. home broadband market. Fixed wireless, provided by the same 4G and 5G networks they must operate in any case, provide a platform for doing so.

Look for Expedited FTTH Investment in U.K. Because of "No Price Controls" Rule

Regulated prices in the connectivity industry generally result in less investment. Pricing freedom, on the other hand, tends to lead to more investment. That was true in the U.S. market and seems to be shaping up in the U.K. market as well. U.S. policy, early in the wake of the Telecom Act of 1996 focused on robust wholesale pricing. 

Wholesale discounts as high as 40 percent encouraged lots of new competitors to buy wholesale capabilities, while also leading the providers of facilities to complain that they had few incentives to invest robustly in optical fiber infrastructure, given the existence of robust mandatory wholesale policies. 

“We currently do not expect to introduce cost-based price controls (on new fiber to the premises) facilities until at least 2031,” said Ofcom. 

That is expected to lead to faster investment by OpenReach and BT, since a higher return is possible. 

U.K. Broadband Illustrates Key Change in Business Model from Voice Era

Consumer internet bandwidth speeds, consumption and retail prices illustrate one enduring issue for connectivity providers: where the voice business was usage based, the broadband access business is largely untethered from usage charging. 

The revenue implications are key: where additional voice usage tended to generate additional revenue, that tends not to be the case for broadband services. As this data from Ofcom illustrates, usage and speeds keeps climbing, but revenue is flat. 

source: Ofcom 

The business model implications therefore are stark. Capital investments must be made without necessarily producing incremental revenue. To keep profit margins stable, other areas of the business must become less expensive, whether that is marketing, sales, operations fulfillment, customer support or customer premises equipment.

Internet Access Speeds Change, Consumer Demand Not So Much

About 51 percent of U.K. customers now buy broadband operating between 30 Mbps and 100 Mbps, according to Ofcom. A quarter of households buy services running slower than 30 Mbps.

About 20 percent purchase services at speeds between 100 Mbps and 300 Mbps. About three percent buy service at speeds greater than 300 Mbps. 

source: Ofcom 

From a supplier’s point of view, increasing available speeds without the ability to boost revenue is an unattractive option. Consumers, for their part, always evaluate speed versus price, buying based on value. They tend not to buy the “best possible” service, but packages that represent value: “enough value for a reasonable price.”

The same dynamics happen in the U.S. market, where in the fourth quarter of 2020, about 8.5 percent of customers purchased gigabit speed access. 

Fully half of U.S. customers purchased service operating at speeds between 100 Mbps and 200 Mbps, according to Openvault. 

source: Openvault 

By about 2025, Ofcom expects the percentage of households buying service at speeds greater than 300 Mbps to remain at about the same percentage of U.K. households. But customers purchasing service at speeds between 80 Mbps and 300 Mbps could grow to 23 percent of households. Roughly half of customers will buy service operating between 55 Mbps and 80 Mbps. 

source: Ofcom

Consumer broadband always is a combination of supply and demand: what internet service providers are willing and able to provide to customers with value and price sensitivities. And Ofcom forecasts suggest a fairly stable market over the next five years.

Online Events Change User Expectations

Online events come with different attendee expectations than in-person events, a major study by Bizzabo finds. 

Bizzabo analyzed data from 967 events (358 in-person, 618 virtual) between September 2019 and September 2020 as well as data on 660,000 attendees (105K in person, 556,000 virtual). 

“Engagement” for virtual events is lower than for in-person events, based on “check-in” rates (people who actually show up, compared to people who have registered to attend). Live or virtual, people only attend about 20 percent of available sessions. 

Compared to live events, virtual events are widely viewed as opportunities for learning, but not for networking. But learning in virtual formats was said to be less than in live settings. 

Expectations for “networking” are four times lower in the virtual format. Also, virtual events are not viewed as “fun” experiences. 

source: Bizzabo

source: Bizzabo

Here are the findings on virtual event prices.

source: Bizzabo

As you might guess, virtual event attendees are more concerned with learning than networking, which is harder in the virtual format than live events. 

source: Bizzabo

Whether virtual or live, most attendees attend 20 percent of available sessions.

source: Bizzabo

You can view here a discussion of the Bizzabo findings. 

SMBs Will Keep IT Services They Adopted During Pandemic

A new survey of small and mid-sized businesses in Australia, Canada, the United Kingdom and United States by Analysys Mason suggests post-pandemic technology priorities will focus on the ability to sustain operations remotely. That means higher spending on mobility services, information technology support for remote workers, more use of cloud applications, replacing desktop PCs with notebooks and tablets, as well as boosting fixed broadband connectivity. 

source: Analysys Mason 

The survey also shows what you might have expected: firms tried--when possible--to continue operations remotely.

“The most urgent priority for many SMBs is to ensure that their business can continue to operate remotely for as long as necessary,” said Analysys Mason. “This includes improving mobile and fixed communications for remote employees.”

Some 38 percent of SMBs in the United States, for example, prioritize mobile connectivity and 33 percent of SMBs in the United Kingdom prioritize fixed connectivity. Ensuring that all of their IT assets can be managed from the cloud will be another key focus, particularly for medium-sized firms (36 percent) and small businesses in the U.S. (36 percent) and the U.K. markets (33 percent). 

Providing remote IT support for their remote employees will be increasingly important for mid-sized firms (38 percent) and SMBs in the United States (36 percent).  

5G adoption was cited as important by 26 percent of Australian SMBs and 29 percent of U.S. SMBs. some 25 percent of Australian SMBs also plan to focus on adopting cloud infrastructure services or cloud based software (SaaS) solutions in the next 12 months. 

Firm tactics have varied by the severity of revenue decline. Hospitality firms have been hardest hit, while financial insurance real estate were the least affected, along with healthcare. FIRE is among industries where remote work is easiest to achieve. 

source: Analysys Mason 

Likewise, firm responses largely correlate with industry ability to continue normal operations while workers are remote. The biggest single change most firms took was to increase use of collaboration tools. Some 35 percent to 45 percent of firms report having done so.

Adoption of all other technologies increased, but generally not more than 15 percent. The survey also suggests that firms will tend to keep using those new tools once the pandemic has ended. 

source: Analysys Mason 

source: Analysys Mason 

Definitions always are crucial when examining the small and medium business communications market. Analysys Mason uses a definition of “small business” including all entities with up to 99 employees. The firm defines a “medium” business as an entity with between 100 and 999 employees.

AT&T Reaffirms Commitment to Content and Content Distribution

When AT&T outlined its market focus at its recent investor day, three priorities were named: broadband connectivity; software-based entertainment and “fantastic storytelling.” Many opposed the acquisitions of DirecTV and TimeWarner, preferring that AT&T remain focused on its connectivity business.

In the wake of the spinoff of DirecTV into a separate asset 70 percent owned by AT&T, it would be tempting to say AT&T is unwinding its move into content ownership and media revenue models. That does not seem to be the case. 

Of the three areas of focus, connectivity represents one. Content distribution represents one. Content creation adds one. To be sure, AT&T generates a majority of its gross revenue from mobility alone. 

source: AT&T 

Still, video distribution generated 14 percent of gross revenue in 2020 and 4.4 percent of free cash flow, with the balance starting to shift away from linear and to streaming. That will change in 2021 as the DirecTV assets are moved outside of AT&T. The move still will produce about $1 billion in free cash flow for 2021, though.

Moving out the DirecTV results, as shown in the following chart, mobility generated 58 percent of free cash flow in 2020. Video content production generated 17 percent of free cash flow, just a bit behind the business wireline segment. 

source: AT&T

One way of describing matters is that AT&T free cash flow generation is led by mobility, with significant contributions from business fixed network customers and the WarnerMedia assets. Fixed network consumer operations generate about nine percent of free cash flow. 

Perhaps a key insight is that overall revenue growth is projected to be in the one-percent range. That is consistent with external estimates made for the global connectivity business as well. 

For a firm the size of AT&T, operating in mature fixed and mobile markets, long-term growth arguably has to come from lines of business outside the traditional core. The impact on cash flow generation could be even greater, as AT&T says the incremental profit margin for each HBO Max streaming customer is extremely high.

“We currently earn 90 percent in margin from each retail subscriber that we add,” said Jason 

Kilar, WarnerMedia CEO. That is akin to what other hyperscale application providers add when gaining an additional user. 

Software as a service margins might be in the 72 percent range. Facebook gross margins are in excess of 80 percent. So the HBO Max streaming service has free cash flow implications far higher than the linear DirecTV service, which might be in the 11-percent range. 

The point is that incumbent tier-one service providers (attackers are the exception) will have to create new lines of business, of some size, to fuel revenue growth. They simply are running out of runway to do so on the strength of their core connectivity businesses. 

So far, content ownership and video distribution have had the most immediate impact on gross revenues and free cash flow, though hopes are substantial for additional growth in business services related to edge computing and internet of things. So far, those businesses are young enough that they are not materially contributing to revenue or free cash flow. 

So critics might be underestimating AT&T’s commitment to content services.

AT&T Somewhat Skeptical about Fixed Wireless, But it Might be a Choice for 70% of U.S. Buyers

AT&T does not believe that customers consuming between one and five terabytes of home broadband data will be best served by a mid-band fixed wireless home broadband product.

“Well, the large consumption that we are anticipating over the next five years will be hard to meet with a wireless-only solution,” said Scott McElfresh, AT&T Communications CEO. There will be places where fixed wireless does make sense, he added. 

“There will be portions of the footprint that will not be economical to serve with fiber,” said McElfresh. “And we would intend to put at the edge of our fiber network this wireless C-band asset, along with our other mid-band spectrum to serve some of the limited use cases that we think are available for a fixed wireless solution.”

“But that's not our primary focus for that band, and that's not our primary focus to serve that heavy demand with broadband,” he noted.

At least in part, the issue is upstream bandwidth, where the difference between downstream data and upstream data has traditionally shown a 10:1 ratio. But AT&T CEO John Stankey argues that the ratio is heading to “something more like 5:1.”

As significant a change as that might be for a fixed network, the challenge is harder for a spectrum-constrained platform such as mobility, which never has the bandwidth provided by a cabled network. 

As always, firm strategy hinges on supplier assessment of their own strengths and weaknesses. T-Mobile and Verizon have much more to gain from taking home broadband share than does AT&T, and fixed wireless is the fastest, most affordable way to do so. 

T-Mobile has had zero market share in home broadband, as it has no retail fixed network business. Verizon has a retail fixed network business, but covers a small percentage of U.S. homes. 

Both firms stand to gain millions of accounts--especially where they do not presently offer any service--using mobile or fixed wireless. 

Comcast has (can actually sell service to) about 57 million homes passed.

The Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

Verizon homes passed might number 18.6 to 20 million. To be generous, use the 20 million figure. 

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to. 

T-Mobile and Verizon have the most market share to gain by deploying fixed wireless.  

“We choose to serve our customers that demand high-speed bandwidth with fiber, and we will utilize our wireless networks to serve those other niche use cases in areas where fiber economics do not make sense,” said Jason Kilar, AT&T WarnerMedia CEO. 

“We think that mid-band spectrum has its role,” said Stankey. “It has its role in being a premium mobility product.” But mid-band spectrum has issues supporting indoor coverage, he argued. “And we think there's better ways to kind of deal with what's going on inside most of the walls of society,” namely fiber to the premises. 

All that can be reasonably argued. But McElfresh also said “our vision would be to have over half of our portfolio or 50 percent of our network covered by that fiber asset” by about 2025, building at about a three million to four million annual rate. 

Proponents of fixed wireless might make exactly the same point: half of U.S. households buy broadband services running between 100 Mbps and 200 Mbps, with perhaps 20 percent of demand requiring lower speeds than that. 

So even if fixed wireless offers lower speeds than cable hybrid fiber coax or telco FTTH, it might arguably still address 70 percent of the U.S. market.