What is Included in "Digital Infrastructure?"

What is included in the more-popular term “digital infrastructure” (infra) these days. Equinix, which most of us would say is in the data center business, says it is in the “digital infrastructure” business. But note: Simplicable says DX includes:

• Cloud computing

• Platforms

• Systems

• Applications

• APIs and integration

• User devices

• Internet of Things

The point to note is that although some think of infra as limited to connectivity networks, practitioners refer to the ecosystem of applications, devices, platforms, hardware and software, computing, networks and systems that support digital work and life. 

Brookings in a study also includes open source as infra. IDC emphasizes cloud services

“for enhancing customer experiences…and…business operations.” Note the explicit link between infra and customer experience and business operations. 

According to Base22, digital infrastructure includes:

• Internet backbone, broadband

• Mobile telecom and digital communication suites, including apps

• Data centers and networks

• Enterprise portals, platforms, systems, and software

• Cloud services and software

• Operational security, user identity and data encryption

• APIs and integrations

The Ford Foundation says “digital infrastructure is the code, policies and standards powering the technology that permeates every aspect of life,” Ford does not mean “code” in a software sense, but in technology values such as equity.

Likewise, the Harvard Business School Digital Initiative looks at infra through a social impact lens as well. 

HCL says “digital Infrastructure is defined by a focus on enabling business agility and powering user experiences that drive customer engagement and loyalty.” 

The World Economic Forum, sees infra through the lens of digital economy, notes that include communications service providers, or CSPs (fixed line and wireless telecommunications companies, cable companies, and bandwidth providers), digital service and content providers (content, media and IT service companies), and hardware and software manufacturers (infrastructure equipment, device, software and component manufacturers) are all parts of the digital infrastructure. 

source: World Economic Forum

The point is that digital infrastructure includes much more than data centers and communication networks. Infra includes  chips, devices, end user software, cloud computing, data centers and connectivity networks, platforms and applications. 

Some would even include social or business impact. A few might include user digital literacy. The point is, it might be better to think of digital infrastructure as part of an ecosystem that overlaps with economic and social goals. 

How Much Can 5G Device Demand Decouple from Network Access?

One curious context for 5G introduction in at least some markets is that it has occurred in the context of unprecedented conditions created by the Covid-19 pandemic. A mobile network billed as providing “much faster speeds and bandwidth” is introduced precisely at a point when workers were forced to work from home and students forced to learn at home, are not as mobile as they once were, and so arguably derive less benefit from 5G speed advantages. 

That has implications for network connectivity demand, as people at home--workers or students--will routinely connect to Wi-Fi rather than using the mobile network. 

In other words, just as we are introducing a “much faster mobile network,” people have less need to be out and about where mobile phones provide their greatest value. 

What remains to be seen is what happens when the pandemic has ended. Many observers expect permanent changes in workforce deployment, with employees spending much more time working remotely, even when some amount of in-the-office work occurs. 

Others now speculate that fewer days of work per week also could happen, with possible four-day workweeks becoming more common. 

All of those trends could reduce demand for mobile connectivity overall and reduce it at some locations such as urban cores and commuting routes. Conversely, more mobile network demand could happen in suburban locations as workers spend more time closer to home.

And, of course, some amount of former mobile traffic will shift to the fixed network (using Wi-Fi). 

Less mission-critical mobility might have other repercussions. If mobiles do not have to be used as often “out and about,” perhaps a “faster network,” while providing advantages, does not supply as much value as if users were out and about--away from home--more often. 

The one exception might obviously be business travel, when the faster speeds are likely to be more important. But business travel remains at depressed levels, for most of us. And even after the pandemic, many question whether former levels will be matched soon. Some believe there will be a permanent downward shift in business travel. 

One bit of anecdotal evidence is my own behavior working from home (which, in fact, I have done for the better part of 30 years). Most of my mobile device connectivity now is on Wi-Fi. 

So relatively rarely do I move about outside the home, and infrequently enough, that I often leave my mobile radios turned off, knowing that I can survive a few minutes of driving with no connection before Wi-Fi kicks in at the location I am going to. 

Once 5G really does offer speeds up to 10 times faster than 4G, and when I am on business travel, 5G will supply lots of value. 

Day to day, working locally, the value will be low, as I have Wi-Fi fast enough to handle my untethered device use cases, or use a direct Ethernet connection for the PC. 

With the caveat that the online poll was not intended to be representative of all users, a survey by GSMArena suggests a certain amount of decoupling of demand for devices and networks, where 5G phones are used only on 4G networks, which is sort of the same point: devices are, to some extent, more decoupled from mobile network support than they used to be. 

Some 34 percent of respondents who use 5G phones say they do not use 5G because it is not yet available. And, with the caveat that behavior is likely to change once 5G is widely available, the poll still shows that demand for phones--and phone features--is to some extent possibly disconnected from the attributes of the network the device will use. 

Some popular consumer devices are designed to be used  independently from any mobile network, using Wi-Fi or Ethernet for connectivity, others are designed to use both 4G and 5G, with a default to 4G when 5G is not available. 

source: GSMArena 

But smartphones are only partly utilitarian devices. They also are fashion. Image and personas. So some 5G phone users have purchased 5G devices even in advance of 5G networks being available, which is a new behavior enabled by handset suppliers emphasizing device features other than 5G. 

The larger question is whether substantial percentages of 5G device owners continue to behave this way--owning 5G devices that do not connect to a 5G network--over the longer term. 

The same question might be asked for customers who do not yet think they “need 5G” or do not buy because it “costs more.” Over time, those objections should cease to be relevant. 

Still, the perceived value of 5G and faster speeds could shift if remote work becomes a permanent fixture and more people are able to rely on Wi-Fi for connectivity much of the time. 

Phone features and fashion demands will still exist, though, so some buyers might find they have appetite for 5G-capable devices even when they are not so convinced they need 5G services as much as they might once have thought they did. 

Value and price packages might eventually evolve to reflect that decoupling.

Applied Physics: Coanda Effect

Some things just seem intuitively "impossible." Consider a surfer on a longboard, standing on the nose of the board. To be clear, stand there when the board is not moving and you will fall off. After you fall, the board will shoot up in the air tail first. 

Try this on a slow, small, mushy wave and the board's nose will dive into the water--it will "pearl"--and your ride will end, immediately. 

On a wave moving fast enough, you can ride this way, even if it seems to somehow defy the laws of physics. It is possible because of the Coanda Effect. It is related to the way an airplane's wing provides lift. 

source: Science Direct

Mobile and Internet Access Prices Have Declined in U.S. Since 1997

Many complaints about “high prices” are justified. Most complaints about the cost of mobile or some  fixed network services most often are not justified--costs for linear video subscriptions being the obvious exception to the rule. 

“At a time when seemingly every other industry in America is raising prices, the wireless industry continues to be mired in an interminable ARPU slump,” says Craig Moffett, co-founder of MoffettNathanson.

Here in the U.S. Bureau of Labor Statistics trend on mobile service pricing since 2011. Note that all these prices are below the basis level of 100 in 1997. In other words, since 1997, the cost of mobile service has dropped more than 50 percent . 

source: BLS

Prices for other consumer services such as internet access also have apparently fallen, even if some reports suggest otherwise. 

Looking at internet access, the U.S. Bureau of Economic Analysis shows a clear decline in costs for internet access between 1988 and 2018, for example. 

source: Bureau of Economic Analysis 

The latest (January 2022) data from the Bureau of Labor Statistics for internet access services shows more than a 60-percent decline in prices since 2004. 

source: Bureau of Labor Statistics 

Data from the U.S. Federal Reserve likewise finds falling prices since 1988. Using a hedonic approach that incorporates improvements in quality, a study prepared for the U.S. Federal Reserve shows a big fall in real prices when “quality of product” changes (including speed) are included in the analysis. 

In other words, even if posted prices seem to be about the same, value is quite a bit higher. In other words, since 1987, value has increased about 20 percent a year while real prices have declined about 20 percent a year. 

source: Federal Reserve 

source: Federal Reserve 

Other analyses also published by the BLS seem to indicate that internet access prices have climbed since 2018. That requires interpretation. 

Here is 2022 BLS data on internet access services and electronic information providers (internet access and other digital services). Prices have climbed since 2018, but are down from the 1997 base level of 100. In other words, prices are about 83 percent of 1997 levels. Some of the increase, we might suggest, is a shift of spending by consumers from lower-priced to higher-priced services.

However, this overstates price changes for consumer internet access, as many other services are included in the analysis that are not “internet access.”

 

source: BLS

This  BLS analysis includes--in addition to residential internet access--web hosting, domain names, and file hosting for non-business use. 

This category also includes residential, including landline, telephone and TV services bundled with residential internet service, including mobile internet access. Other monthly subscriber fees are included as well, including  internet rental equipment, internet service fees, installation and activation fees, and other associated taxes and fees.

This category does not include any other bundled services such as home monitoring services and wireless telephone service. Fees for online activities such as music or video downloads, streaming media (both music and video), fees for online gaming, and subscriptions to online newspapers or magazines are all excluded.

 Fees to access additional information or services provided by particular websites, such as those offered by popular sporting websites are also excluded. Pre-recorded video on demand subscription streaming services are excluded.

Still, even using this definition, inflation-adjusted prices are 20 percent lower than in 1997. 

The other caveat is that this data does not clearly separate internet access from price trends for the other information services. Some of us would bet that higher prices for information services are principally driving the price increases since 2018. 

Landline voice services and linear video services, on the other hand, have risen in price since 1997. Cable TV services are about 550 percent higher than 1997 prices. Voice services are close to 140 percent higher than in 1997.   

The bottom line is that prices for mobile service and internet access in the U.S. market have declined since about 1997. They have declined much more if hedonic quality changes are considered.

Dense Fiber Networks Will be Necessary for All Mobile Platforms After 5G

Dense fiber networks are key for telco home broadband, 5G small cell networks and internet access for enterprises and small business. They might become important to support private networks and edge computing as well. 

Dense fiber networks also are virtually a necessity for all future generations of mobile networks beyond 5G. 

The reason is the use of ultra-high frequencies and the corresponding need for small cell networks. Coverage requirements--even coverage spectrum in the low-band and mid-bands--also will likely rely on denser networks as well.

Though new spectrum is among the tools mobile operators use to increase capacity, the biggest boosts have come from shrinking cell sizes. Eventually, as mobile operators try to keep pace with data demand using their “coverage” spectrum (low-band and mid-band), it will make sense to shrink cell sizes even of the coverage network spectrum. 

All that means dense fiber access and distribution networks will assume a permanent place in mobile network design. 

Given a choice, executives in the mobile business would prefer to use lower-frequency spectrum than high-frequency assets. Lower frequencies propagate better, so are easier to manage when coverage is really important. But executives do not have unlimited choice. 

Lower-frequency assets are largely allocated to various other users and even when low-frequency assets can be reclaimed, bandwidth necessarily is limited, as frequency and capacity are directly related. As optical fiber inherently supports higher bandwidth, so higher wireless frequencies support higher capacity. 

That means  teraHertz communicaitons are going to be part of the future mix of mobile communications, even though we have only begun to use millimeter wave frequencies. 

source: Mi-Wave 

Ultra-dense optical fiber networks will be necessary, as teraHertz signals dissipate after a score or two meters, using currently-available radio technology. So coverage will likely continue to be dominated by low-band and mid-band frequencies, with millimeter increasingly used for high-demand areas where optical fiber backhaul is prevalent. 

Commercial teraHertz coverage might well resemble Wi-Fi distances, if even more challenging as signal propagation is line of sight. That suggests optical fiber density very close to fiber-to-home deployments.

5G: Long Term, Take Rates Matter; Near Term, Coverage Matters

Usage, rather than coverage, is the ultimate test of a mobile network’s success, but coverage is temporarily more important during the early days of construction of a new next-generation network. 

Customers cannot buy what cannot be sold. But once available, whether they buy--and how much--is the issue. That is true for either 5G or mobile internet. According to the GSMA, about 93 percent of people--about 3.4 billion--globally still not using the internet with mobile devices live in low-income or middle-income countries. 

But network availability is not the big problem: Just about six percent of those people--six percent--are not reached by a network, says GSMA. 

source: GSMA 

Right now, in most countries, 5G is being introduced, so coverage is an issue. 

If there are, by 2025, 3.6 billion 5G connections in service,  then 5G could represent about 20 percent of all mobile phone connections globally, according to CCS Insight. Some older estimates called for 15 percent adoption, on less than two billion subscriptions in 2025. Yet other forecasts call for three billion 5G subscriptions by 2025.  

Estimates vary at least in part because possible connections (subscriber identity modules) are higher than the number of devices in use (subscribers). According to GSMA, there could be 8.8 billion connections by 2025, but only 5.7 billion unique people who are subscribers. 

It makes a significant difference whether the denominator is authorized SIM cards or active users. 

source: CCS Insight 

On the other hand, 5G adoption rates seem to be higher than for 4G, as much as four times faster, according to 5G Americas. So estimates for 2025 5G adoption are trending towards the forecast of 3.5 billion connections. 

 

That obviously will be accompanied by matching growth of 5G device sales. According to the IDC Worldwide Quarterly Mobile Phone Tracker, shipments of smartphones are forecast to reach 1.38 billion units in 2021, an increase of 7.7 percent over 2020. This trend is expected to continue into 2022, when year-over-year growth will be 3.8 percent with shipments totaling 1.43 billion.

Source: IDC 

By about 2025 5G devices could represent 80 percent of new device sales globally, IDC seems to estimate. That should scale with 5G account connections as well. CCS Insight believes 5G connections will be about 35 percent of all mobile connections in lead markets such as South Korea by 2025. 

5G Connection in South Korea

source: CCS Insight 

Mobile Operator Questions About 5G Payback Model Reflect 4G Experiences

Many in the mobile ecosystem ask the question “how will we make money from 5G? Fixed network operators have been asking themselves similar questions--"how do we get a payback from fiber-to-the-home?"--for several decades.

For mobile or fixed network operators, competition and changing demand make payback models uncertain and challenging. Where facilities-based competiton exists, the infrastructure cost per customer account always rises.

Stranded assets are the reason, though more an issue for fixed networks. In a monopoly market, the single provider might hope to get close to 98 percent take rates. In a competitive market with two equally-capable providers, each provider might hope to get 50 percent share of the installed base.

That effectively doubles the network cost per customer, as revenue is earned from about half of locations passed. In markets with three or more facilities-based competitors, cost-per-account increases more.

Demand changes also effect payback models. Fiber to the home once was underpinned by the assumption that there would be high demand for up to three services (voice, video and internet access).

As demand for fixed network voice and linear video subscriptions declines, the business model increasingly is built on home broadband. Voice and linear video help, but both are expected to keep declining.

But that has key revenue implications. Where a home location might have been expected to generate revenue of $80 to $200, the growing reality is that a location is expected to generate perhaps $50 in home broadband revenue, and then some amount of voice or other revenue from some locations.

Basically, revenue expectations--average revenue per customer or location--are effectively cut in half. That forces changes to the payback model on the cost side. Basically, costs must drop.

Those savings can come from intrastructure cost declines; operating cost drops; higher subsidies; lower maintenance costs; lower headcount and overhead or any combination.

The key point is that revenue assumptions for fixed networks increasingly are founded on lower gross revenue assumptions; revenue from additional sources; shared costs between mobile and fixed networks and more importance attached to defending market share or taking market share.

The parallel question asked by mobile operators--"how do we make money from 5G?--embeds some of the same issues faced by fixed network operators.

What the question likely means is less an uncertainty about revenue drivers and more a concern about the distribution of value within the ecosystem: will mobile operators reap a fair share of 5G benefits (higher revenue, higher profits, higher market share, lower operating costs)?

Looking only at consumer retail costs--exclusive of experience advantages such as higher speed; lower latency; new services or capabilities--it is not yet completely clear that average revenue per 5G account is higher than 4G ARPA.

5G has proven to generate higher ARPA in some markets, however.

It is a virtual certainty that 4G and older connections will be replaced by 5G. So the baseline for 5G revenue is 4G revenue. Beyond that, there is expected upside from private networks, network slicing (virtual private networks), edge computing and new enterprise connections to support internet of things use cases. 

To be sure, many wonder whether “we can charge more for 4G?” The long-term answer is not yet knowable, but the practical answer might well be “yes.” 

And that can be true even when direct tariffs for 5G are not that different, if different at all, from 4G tariffs. Some mobile operators do not charge a premium for 5G, but expect to gain market share, which drives higher 5G revenue.

Other service providers provide incentives for customers to use 5G but with a price increase coming in the form of unlimited usage. The actual driver of higher revenue per account is the shift to a higher-priced “unlimited usage” tier, not 5G as such, though such plans include 5G access at no extra charge. 

And though we have not seen it much, if at all, some mobile operators might decide to institute speed tiers for mobile service that mimic the ways access is sold on fixed networks. Customers might be offered lowest prices for lowest speeds; mid-tier pricing for mid-tier speeds and premium prices for the higher speed tiers. 

But there is another sense in which the question of “how will we make money from 5G?” can be understood.

Customers got value in terms of higher speeds when 4G was introduced. Mobile operators expected to sell more data, which would generate more revenues, and also create new services that would further increase revenues. 

But tough competition in many markets meant that mobile operators were not able to charge a price premium for 4G access. So the benefits went largely to consumers, according to ING analysts. “They got more data, better speeds and often paid less,” ING says. 

Governments also raised billions in revenue from spectrum auctions.

So one way of understanding the question about 5G revenues is the distribution of value and revenue for mobile operators within the 5G ecosystem. The downside for mobile operators is lower recurring revenues from 5G, compared to 4G. 

“Operators do not want to repeat these mistakes” seen in the transition from 3G to 4G, ING notes. But some might argue that the long-term trend will be difficult to break. 

source: Statista 

source: Strategy Analytics

source: Researchgate  

Taking market share, shifting customers to pricier accounts and increased usage charges are the immediate ways mobile operators have boosted 5G revenues over 4G levels. 

Longer-term pricing trends, though, might be difficult to change, as prices have been declining since 1996. 

On the other hand, the whole reason we see a next-generation mobile network about every 10 years, since 3G, is that capacity demand by customers keeps climbing. And while mobile operators can increase effective capacity using small cells and better radios, at some point an increase in spectrum is required. 

Also, as modulation and coding gets better with each successive generation, the cost to deliver a bit drops, allowing mobile operators to supply data consumption demand at lower costs. 

So another way to look at the payback model is to ask “what happens to your business if you do not upgrade to 5G?” Defending existing market share is a legitimate business outcome. 

Creating a more-efficient data network that supplies demand affordably also is an important business outcome. And to the extent 5G network capabilities are required to support dense internet of things networks, edge computing networks and network slicing, not investing in 5G forsakes any revenue opportunities in those areas. 

In many ways, that is akin to the value of fiber-to-home networks. In many cases, higher revenue per account is not expected. The business value instead comes from consumer market share gains, market share defense and the ability to compete in those markets. 

There is incremental value in terms of backhaul support for mobile small cell networks or business-grade services for smaller businesses. There is value in reduced operating expenses and possibly headcount. 

In other words, there are lots of ways 5G contributes to overall business value for mobile operators that go beyond direct tariff increases.