Global Bandwidth Growth Reflects New Business Models, Computing Architectures, Media Types

Wide area network bandwidth used to be scarce, and therefore expensive, in the decades where the primary application requiring WAN bandwidth was voice communications. In the late 1980s, for example, the cost of WAN capacity of about 1 Mbps was significantly more than $10,000 a month. And speeds were in the kilobytes per second range. 

By 2012 costs had fallen to a few dollars a month, a difference of about four orders of magnitude. In part, we can credit Moore’s Law for the improvements. But business models and use cases also drove the demand for cheaper WAN bandwidth. `

source: Backblaze

Lead applications have changed. But so have whole business models and revenue streams. International and long distance voice used to be the profit driver for telcos. These days, mobility and internet access are the drivers. But voice never is a bandwidth hog, mobile or fixed.

As the internet has become the preferred delivery mechanism for high-bandwidth apps such as video entertainment, bandwidth requirements have shifted accordingly. The business case for streaming video does not exist without cheap bandwidth. In other words, cost for bit has to be orders of magnitude lower than previously.

With TCP/IP the global choice of "next generation platform," with the shift to cloud computing and remote storage, a shift from multicast (broadcast) to unicast content, plentiful and cheap bandwidth is the new requirement.

source: Telegeography 

At the same time, there are new locations where that demand is generated. 

These days, voice demand is paltry in relation to content bandwidth--largely video--that flows between hyperscale application provider data centers and internet points of presence where local internet service provider traffic pours onto the backbones. 

In other words, if you know the locations of the hyperscale app provider data centers, you also know the locations between which most data flows over WANs. 

source: Telegeography 

Also, it is hard to overestimate the role played by consumer content as the media type that underpins most WAN traffic need. 

source: Telegeography 

Though the role of content is not so dominant on every route, content dominates traffic moving across the Pacific and Atlantic oceans and within Asia. 

source: Telegeography 

Ecosystem, Platform, Value Chain: What's the Difference?

Ecosystem is one of those buzzwords used without explanation, all the time. Some appear to use the term “ecosystem” to describe the range of partners a firm may have. 

Others appear to use the word to describe third-party applications that interwork with, or are available to use, on a device or a network. 

Finally, the classic, pre-digital and pre-internet “ecosystem” was a vertically-integrated end-to-end solution. 

The term might be confused with platform. The issue there is that there are several different ways the term is used. In the computing business, a platform is a set of hardware or software upon which other third-party apps can run. So Windows has always been seen as a platform, as have the Intel line of processors. 

In that sense, the internet is a platform for both communications and applications. But there is a new sense of the term that refers strictly to business model, not computing or communications infrastructure. 

In the internet era a new meaning has emerged. A platform is a business model based on an entity that acts as an exchange, connecting buyers and sellers. 

source: Simon Torrence 

A platform business model essentially involves becoming an exchange or marketplace. A pipe model requires a firm to be a direct supplier of some essential input in the value chain.

A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. A pipe business creates and then sells a product directly to customers. Amazon is a platform; telcos and infrastructure suppliers are pipes. 

Amazon is a platform. Etsy is a platform. Uber and Lyft are platforms. Airbnb is a platform. All connect buyers with sellers; sellers with sellers or buyers with buyers. None of those platforms “owns” the assets traded on the exchange. 

It all boils down to “who makes the money” and “how” the money is made. Even when understood as a business-to-business marketplace, a bandwidth exchange, for example, a key principle is that buyer and seller transactions volume is how the platform makes money. 

A true platform in the digital commerce sense does not own the actual products purchased using the platform, and makes money by a commission or fee for using the platform to complete a transaction. A ridesharing platform does not own the vehicles used by drivers. A short-term lodging platform does not own the rooms and properties available for rental. An e-commerce site does not own the products bought and sold using the platform. 

“Ecosystem” sometimes also seems to be used in the sense of value chain, a business model that describes the full range of activities needed to create a product or service. 

source: Analysys Mason 

Also, firms have for decades been moving towards products that combine physical goods with software; content with appliances; implements and experiences. Among the classic examples in the mobile device business is Apple bundling devices with content; device with app store; device with payment mechanisms; sales with support. 

Almost by definition, ecosystems are loosely coupled. There might not be a direct business relationship between any two firms in an ecosystem. Ecosystem participants might come from distinct industries, geographies or roles. So digital ecosystems are quite complicated. 

“A digital ecosystem is a complex network of stakeholders that connect online and interact digitally in ways that create value for all,” says Tata Consulting Services. 

 

It is hard to organize an ecosystem. It is difficult to create a platform business model. It can be tough to develop a value chain. For most businesses, creating a simple role within a value chain is task enough. 

Acting as a retailer of products to end user customers, for example, can be complex enough. Creating ecosystems or platforms is quite something else.

Who Wins With 5G and Why

In retrospect, we might argue about whether the adoption rate of 4G globally or in any single country "has really mattered," and if so, how, and for whom. Without a doubt, 4G has mattered for video content providers, social media apps and platforms. Given widespread consumer use of such apps, it is arguably the case that consumers have benefited. It is less clear it has benefited mobile operators as much.

What happens with 5G is unclear at the moment.

We aren’t sure yet how fast 5G will be adopted, compared to 4G experience. For that reason, subscriber totals in five years will vary quite a lot: as much as 100 percent. What is more important is the average revenue per user or average revenue per account trend.

Can 5G lift ARPU or ARPA, and if so, by how much? 

If there is no ARPU or ARPA change, then the number of 5G accounts swapped for 4G will not matter much, in the near term. Longer term, it will matter if new use cases--requiring 5G capabilities--develop. 

Scale matters, so adoption rates matter. New use cases will develop faster when developers can assume a significant portion of users have the new 5G capabilities. 

There will be 3.9 billion 5G mobile subscriptions globally by the end of 2026, GlobalData predicts. GSMA, on the other hand, estimates there will be 1.8 billion 5G mobile subscriptions in 2025. At a 20-percent growth rate, that implies 2026 subscriptions of perhaps 2.2 billion. 

On a base of nearly nine billion accounts, those forecasts imply adoption ranging from a low of 20 percent to more than 40 percent by 2026. 

Statista estimates 2026 5G subscriptions at about 3.5 billion; Bankr suggests 5G subscriptions will reach four billion as early as 2025. Ericsson forecasts about 3.5 billion 5G accounts by 2026. 

Much hinges on the  predicted adoption rate, the expected adoption inflection point and the time of 5G availability. It took four to five years from launch for 4G to reach a growth inflection point, where the rate of adoption accelerates. 

source: Ericsson 

The issue is whether 5G is adopted at the same pace, faster or slow than 4G. It also matters when 5G is launched in each country and how fast mobile operators decide to deploy. Many operators are controlling 5G capital investment by deploying at a deliberate and measured pace. That also has implications for subscriber figures. 

source: Bankr 

Perhaps of equal importance are 5G average revenues per account. GlobalData expects global 5G service revenues in 2026 of $609 billion, propelled by monthly average revenue per user (ARPU) of $14.15, more than double 4G’s monthly ARPU. That would be a really big deal, if it happens. 

As always, “average” might not mean much, as account revenue ranges from a dollar or two dollars in some countries to more than $40 in other countries. 

source: S and P Global Market Intelligence 

Still, the real question is not how fast 5G is adopted, but what the revenue implications might be. A bit faster or slower is an issue, but not so much as wether revenue per account is the same as 4G, lower than 4G or higher. 

A doubling of ARPU or ARPA would be truly significant. 

App providers might gain from new 5G platforms able to use specific 5G-enabled capabilities (speed, latency, network slices, edge computing, internet of things, private networks). As those features are rolled out, consumers should benefit from experiences not possible on 4G and older networks.

The big surprise would be if mobile operators also directly benefited in terms of business models, revenue and profit. Also, how much they could benefit will be important.

70% or More Digital Transformation Initiatives Fail

When digital transformation initiatives fail--and there is no particular reason to believe the track record for DX will be much different than the history of all information technology projects--the reasons for failure will also likely be the same:

• Company Culture is not aligned

• CxOs do not really support it

• Silos

• Knowledge gaps about cause and effect

• Indecision or tepid initiatives

• Technology novelty not harnessed to business processes

• Expectations not in line with reality

• Not iterating fast enough

• Human capital mismatch

• Lack of continuity and consistency

• Unclear vision

• Business and IT execs do not agree on objectives

• Organizational inertia

• Lack of employee buy in

• Governance not aligned

source: BCG 

Historically, up to 70 percent of information technology projects fail to meet their objectives. Some would argue the digital transformation failure rate is the same. Some industries do better than others, especially consumer-facing businesses and industries. The success of e-commerce is one likely reason why that occurs. 

The important point is that only 20 percent to 30 percent of digital transformation efforts are likely to succeed. 

source: KPMG 

And some industries do better than others. Consumer-facing businesses do better because e-commerce is such an easy decision to make. You might not be surprised that public sector initiatives are the least successful, according to an analysis by BCG. 

source: BCG

 

source: BCG

 

Are "Customer Experience" and "Digital Transformation" the Same?

You could get an argument about whether “digital transformation” is a subset of “customer experience” or vice versa. Many will use the terms interchangeably.  Marketers will tend to subsume DX as part of CX. Some will argue DX includes CX, as DX affects the whole business model, not just customer interactions with a brand. 

Supporters of the “DX is a subset of CX” might say Customer experience is how your customers perceive all of their interactions with your brand.So DX would represent all interactions between an organization and its customers experienced through a digital interface like a computer, smartphone or tablet. 

Others who might view the terms interchangeably might argue that digital transformation is the integration of digital technology into all areas of a business, fundamentally changing how a firm operates and delivers value to customers. 

 

Supporters of the “CX is a subset of DX” would base their views on the idea that DX represents digital transformation is all about becoming a digital enterprise: an organization that uses technology to continuously evolve all aspects of its business model.

The business model, in turn, is the framework for everything a business or organization must do to identify a need, a customer, a solution, a means to produce and deliver that solution. 

It might be fair to argue that CX is a platform for customer engagement, the ways a firm digitizes marketing and sales experiences. It might also be argued that DX refers to business operations more broadly, including product development and manufacturing, not just sales, marketing and customer support. 

But the view of “DX as business model change” also centrally involves potential changes of problems; customers; solutions and fulfillment. 

Depending on the context and job role, user experience might also be an issue, with UX a subset of CX, with DX changing CX. Some marketers will wrap user experience inside customer experience which is nestled inside brand experience. 

source: Brian Solis  

So it is helpful when discussing digital transformation to understand which sense of the phrase we are using. All of the definitions involve brand perception in some way; sales and marketing in some way; customer support and interaction in some way. 

There are several ways to create Venn diagrams we might use in describing CX and DX and others that incorporate user experience, brand experience or other dimensions of firm operations. 

source: Gartner 

To avoid confusion, it is helpful to know which context we are using when discussing DX. 

For Most Telcos, Net Revenue Gain Comes not from 5G but Elsewhere

For the foreseeable future, net changes in telco revenue can happen only at the margin. Over the next decade, mobile operators, for example, will replace half their 4G accounts by 5G accounts. So the issue is whether average revenue per account stays the same; increases or decreases. 

Assuming at least a stable ARPA, the balance of revenue changes will come in fixed network services. And there the issue is whether new revenue sources offset expected losses in consumer and business service revenue. 

Keep in mind that revenue-neutral product replacement is necessary, but will not help telcos grow total  revenues. Product replacements only swap legacy revenue for new sources, as in the example of 4G accounts being replaced by 5G accounts. 

All things equal (operating costs; marketing costs; capital investment; revenue per account), swapping 5G for 4G results in zero net revenue gain. All revenue growth beyond zero must come in other areas. 

On a global level, revenues appear flat. But revenue contributors change substantially every decade. In fact, telcos routinely lose half of present revenues every decade. That seems unthinkable, but has happened. 

“Over the last 16 years we have grown from approximately 25 million customers using wireless almost exclusively for voice services to more than 110 million customers using wireless for mostly data services,” said Lowell McAdam, former Verizon Communications CEO.

It is an illustrative comment for several reasons. It illustrates Verizon’s transformation from a fixed network services company to a mobile company. But the comment also illustrates an important business model trend, notably that of firms in telecom needing to replace about half their current revenues every 10 years or so.

In the U.S. telecom business, for example, we already have seen that roughly half of all present revenue sources disappear, and must be replaced, about every decade.

According to the Federal Communications Commission data on end-user revenues earned by telephone companies, that certainly is the case.

In 1997 about 16 percent of revenues came from mobility services. In 2007, more than 49 percent of end user revenue came from mobility services, according to Federal Communications Commission data.

Likewise, in 1997 more than 47 percent of revenue came from long distance services. In 2007 just 18 percent of end user revenues came from long distance.

Though revenue attrition has been clearest for fixed network voice, the same process has been seen for mobile voice, text messaging, long distance revenues, mobile roaming and business customer revenues overall, in many markets. 

We can disagree about how much new revenue some communications service providers will have to create over a decade’s time, to replace lost legacy revenues.

If global telecom revenue is about $1.6 trillion to $2 trillion, and assuming about half the revenue is earned in mature markets, then the revenue subject to disruption ranges from $800 billion to $1 trillion.

Half of that represents $400 billion to $500 billion. That, hypothetically, is the potential amount of global revenue that might be lost, and would have to be replaced. The good news is that most of the replacement will come as 5G displaces 4G subscriptions. 

What is equally certain is that a huge amount of revenue from new services will be necessary, even if consumer purchases of Internet access--and replacement of 4G by 5G--happens.

One fundamental rule of thumb is that, in mature markets,  service providers must plan for a loss of about half of current revenue every decade or so. That might seem shocking, but simply reflects historical developments.

Nor is that rate of change unusual. In the digital consumer electronics business, it might not be unusual for an executive to predict that half the products that drive sales volume in 10 years “have not been invented yet.”

What is new for the telecommunication business is that product replacement now is a fundamental issue, even if for 150 years the only product was voice.

source: IBM

In 2001, in the U.S. market, for example, about 65 percent of total consumer end user spending for all things related to communications and video services went to "voice."

By 2011, voice represented only about 28 percent of total consumer end user spending.

Over that same period, mobile spending grew from about 25 percent to about 48 percent. Again, you see the pattern: growth of about 100 percent (losses of 50 percent require gains of 100 percent, to return to an original level,  as equity traders will tell you).

Video entertainment spending likewise doubled.

In the U.S. market, one can note roughly the same pattern for long distance and mobile services revenue. Basically,mobile replaced long distance revenue over roughly a decade.

At one time, international long distance was the highest-margin product, followed by domestic long distance.

That changed fundamentally between 1997 and 2007.

Over that 10-year period, long distance, which represented nearly half of all revenue, was displaced by mobile voice services.

In the next displacement, broadband is going to displace voice.

That is not yet an issue in some regions that still are adding mobile and fixed network subscribers, but already is an issue in most developed regions, where voice and messaging revenues already are declining.

source: STL Partners

Though some might continue to hope that higher Internet access revenues will offset voice and messaging revenue dips, the magnitude of voice revenue declines will be so sharp that in many markets, even additional Internet access revenues will be insufficient in that regard.

In fact, rates of revenue growth have been dropping in all regions since at least 2005, according to IBM.

At least so far, ability to fuel growth by extending service to customers with low average revenue per user will continue to drive revenue growth, even for legacy services, for a while. The only issue is when saturation is reached in each particular market.

When that happens, the same pressure on voice and messaging revenue already seen in mature markets will be seen in presently-growing markets.

Those changes can be hard to discern, as the top line obscures changes in revenue contribution from the largest sources. Voice, messaging and long distance services have fallen dramatically. Consumer fixed network usage of voice no longer drives financial results, its place taken by internet access (broadband). 

Mobility now drives growth in most markets, and especially the data services component of mobile revenues. Subscription growth still is highly meaningingful in developing Asia and Africa. 

source: Delta Partners 

Basically, 5G mostly prevents telco revenue from declining. It does not drive revenue growth. If we expect continued declines in fixed network voice, then broadband and other new services will have to be relied on for most of the growth, in most markets, by most operators. 

The lucky scenarios will happen when mobile-first operators actually are able to drive higher ARPA in the 5G era.