Should Telcos "Stick to What They Know Best" or "Move into Adjacencies?

One recurring strategic problem for connectivity providers is whether to focus on what they know best--connectivity over the wide area network--or to move "up the stack" or "across the value chain" to take on new roles beyond connectivity. That has historically proven to be quite difficult.

But opportunities to reverse declining revenue growth rates might be difficult if service providers choose to remain focused primarily on their traditional connectivity roles, as revenue growth rates have slipped for the past decade globally.

For example, most telcos globally have to contend with revenue growth that has declined between 2017 and 2020, according to data from World Wide Technology. 

source: World Wide Technology 

Some of the challenges grow from various roles beyond connectivity, assuming continued low growth rates in the core connectivity business. In edge computing, for example, as with most other applications and use cases, the highest value--and most commonly the highest financial return--come from the actual application role. 

The lowest value, and typically most modest return, comes from the real estate function supporting edge computing. World Wide Technology estimates that 59 percent of edge computing revenue will be earned by the actual computing services--the end user facing apps-- supplier, for example. 

source: WWT, Analysys Mason 

As defined by Analysys Mason, the “edge location owner” role is the traditional connectivity function.

The “edge connector” role is different, entailing integration of edge computing with the enterprise’s current infrastructure, with specific focus on cybersecurity capabilities.

The “edge application enabler” role involves end-user use cases and associated applications. 

To succeed as an “edge connector,” mobile and fixed network service providers must operate much more as system integrators, with “some expertise” to “great expertise”  in integrating edge computing with the existing platforms. 

Few mobile or fixed operators have natural competencies as providers of the end-user-facing applications and business use cases. 

Even if a Niche, Fixed Wireless Can Have Outsized Returns for Some Firms

Some niches are more important than others, especially for some contestants in the U.S. home broadband market. Revenue growth is not always and necessarily the big story. A niche in fixed wireless might have outsized returns for firms such as T-Mobile, which historically has had zero market share in home broadband, or for Verizon, which not can compere nationwide in that market, where it historically has been limited to about 20 percent of the national U.S. market.

Fixed wireless is not new, having been used to support home broadband for decades. three million fixed wireless home broadband accounts in service in the United States, for example.  

What is new is the ability of 5G fixed wireless to supply higher bandwidths with less deployment cost. Where traditional fixed wireless required direct line of sight positioning, 5G fixed wireless allows self installation by consumers with no elaborate wireless engineering work or a truck roll to install antennas. 

And though fixed wireless also has been a niche platform--key for wireless internet service providers--it is a major platform for big mobile operators such as T-Mobile and integrated operators such as Verizon to enter or expand their share of the home broadband market. 

"We expect fixed wireless will make up 45 percent of broadband net adds in 2022 and 50 to 55 percent thereafter," says ISI Evercore. "We expect that in 2025 fixed wireless will have seven percent share of total broadband subscribers.”

Right now it is a matter of debate whether the primary fixed wireless market will be in rural areas or elsewhere. But we might already note that, in the third quarter of 2021, though fixed wireless represented significant net account additions, the Fios fixed network garnered 43 percent of the new accounts. 

One quarter later, fixed wireless accounted for 74 percent of home broadband net additions. 

source: Verizon

 

source: Verizon

source: Verizon 

Fixed wireless might always be a niche, but it is a fast-growing niche and key for the home broadband aspirations of T-Mobile and Verizon. 

Lumen FTTH Revenue Assumptions Show FTTH Business Case has Changed

Lumen reports its fiber-to-home average revenue per user at about $58 per month. For those of you who have followed fiber-to-home payback models for any length of time, and especially for those of you who have followed FTTH for many decades, that level of ARPU might come as a shock. 

Though some honest--and typically off the record--evaluations by some telco executives 25 years ago would have predicated the FTTH business model as “you get to keep your business” rather than revenue increases. 

Few financial analysts would have been impressed. 

The theory was that upgrading to FTTH would allow incumbent telcos to essentially trade market share with cable companies: gaining video subscription market share from cable as cable took voice share. The assumption was that home broadband share would remain about where it was. 

The thinking was that per-home revenue could range as high as $130 to $200 per month, even as overall market share was gained by cable and lost by telco providers. 

So the $58 ARPU is a shock. Essentially, telcos are investing in FTTH to reclaim market share in home broadband, but largely harvesting video and voice revenues, both of which are dropping. 

Some telcos able to operate in both mobile and fixed network segments of the business have seen revenue growth shift decisively to mobile sources. 

Incumbents restricted to fixed network services only have faced huge challenges, which explains why many have been acquired by private equity and institutional investors with different financial motivations. 

Much investment in digital infrastructure is made to gain exposure to alternative assets that in past decades would have consisted of real estate holdings. The objective is asset diversification into a category that offers stable long-term cash flow with some presumed moats, but not necessarily revenue or asset value growth. 

If FTTH ARPU for home broadband remains in the $50 to $60 range, then payback models from FTTH will have to incorporate additional revenue sources, especially for publicly-traded firms. 

That is why one hears so much about FTTH value for supporting 5G small cells, edge computing, internet of things and private networks and network slicing. 

Monthly recurring FTTH revenue of $50 to $60 for home broadband might be strategically important for a telco’s sustainability, but unattractive if the argument is made that “FTTH will boost consumer revenues.” It might not.

On the other hand, without the upgrade to FTTH, most fixed network telcos face extinction. Investors will not like the idea that FTTH basically allows the business to remain viable, but does not necessarily lead to additional revenues. 

The same sort of worry also exists for 5G and coming mobile next-generation platforms. These days, the upgrades are necessary for business survival. Hopefully, new revenue sources develop, at scale.

But even if they do not, the capital investment is required. If not, the viability of the business is threatened.

Verizon Activates 2 Gbps Service; Comcast 3 Gbps: All Pointing to 10 Gbps

With the news that Verizon is introducing 2-Gbps symmetrical fixed network access in New York for about $120 (using autopay), along with Comcast’s similar moves to 3 Gbps, we see continued improvement in home broadband in the U.S. market, and a continual movement towards 10 Gbps service. 

Comcast prices its 3-Gbps service--available nationally--at about $300 a month, making it a service mostly appealing to business users. The service also has a $1,000 install fee. 

The Verizon 2-Gbps service clearly is aimed more squarely at the top end of the consumer market, while also having appeal for business users. 

At the same time, the increasing speeds also are accompanied by lower prices. 

According to a new study, U.S. home broadband prices have fallen since 2016, says Broadband Now. 

Broadband Now says that the average price for internet in each speed bucket starting in the first quarter of 2016 compared to the fourth quarter of 2021 has fallen:

• The average price decreased by $8.80 or 14% for 25 – 99 Mbps.

• The average price decreased by $32.35 or 33% for 100 – 199 Mbps.

• The average price decreased by $34.39 or 35% for 200 – 499 Mbps.

• The average price decreased by $59.22 or 42% for 500+ Mbps.

source: Broadband Now 

U.S. home broadband prices have fallen since 2016, according to a study by Broadband Now. 

Broadband Now says that the average price for internet in each speed bucket starting in the first quarter of 2016 compared to the fourth quarter of 2021 has fallen:

• The average price decreased by $8.80 or 14% for 25 – 99 Mbps.

• The average price decreased by $32.35 or 33% for 100 – 199 Mbps.

• The average price decreased by $34.39 or 35% for 200 – 499 Mbps.

• The average price decreased by $59.22 or 42% for 500+ Mbps.

source: Broadband Now 

Verizon Introduces 2-Gbps Service In New York, at Prices as Low as $120 Per Month

With the news that Verizon is introducing 2-Gbps symmetrical fixed network access in New York for about $120 (using autopay), along with Comcast’s similar moves to 3 Gbps, we see continued improvement in home broadband in the U.S. market, and a continual movement towards 10 Gbps service. 

Comcast prices its 3-Gbps service--available nationally--at about $300 a month, making it a service mostly appealing to business users. The service also has a $1,000 install fee. 

The Verizon 2-Gbps service clearly is aimed more squarely at the top end of the consumer market, while also having appeal for business users. 

At the same time, the increasing speeds also are accompanied by lower prices. 

According to a new study, U.S. home broadband prices have fallen since 2016, says Broadband Now. 

Broadband Now says that the average price for internet in each speed bucket starting in the first quarter of 2016 compared to the fourth quarter of 2021 has fallen:

• The average price decreased by $8.80 or 14% for 25 – 99 Mbps.

• The average price decreased by $32.35 or 33% for 100 – 199 Mbps.

• The average price decreased by $34.39 or 35% for 200 – 499 Mbps.

• The average price decreased by $59.22 or 42% for 500+ Mbps.

source: Broadband Now 

U.S. home broadband prices have fallen since 2016, according to a study by Broadband Now. 

Broadband Now says that the average price for internet in each speed bucket starting in the first quarter of 2016 compared to the fourth quarter of 2021 has fallen:

• The average price decreased by $8.80 or 14% for 25 – 99 Mbps.

• The average price decreased by $32.35 or 33% for 100 – 199 Mbps.

• The average price decreased by $34.39 or 35% for 200 – 499 Mbps.

• The average price decreased by $59.22 or 42% for 500+ Mbps.

source: Broadband Now

A Handful of Hyperscale App Providers--and Video--Drive Global Internet Traffic

There is a simple reason why hyperscale app providers  now drive global data traffic. The single greatest driver of WAN demand is movement of traffic between a handful of hyperscale app provider data centers.

In 2021 just six firms generated 57 percent of global traffic, and much of that WAN traffic supported data flowing between hyperscale data centers. In 2021, intra-data-center traffic was about at the same magnitude as data consumed by retail end users.  

moving between data center locations.  

source: Cisco 

About six firms are responsible for about 57 percent of 2021 WAN traffic, according to Sandvine. 

source: Sandvine, IN Forum

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.

Digital Transformation is Safer When it is "Smaller"

There is a good argument to be made that digital transformation is so prone to failure that a safer strategy is avoid "big" goals and instead concentrate on numerous "smaller" goals, even when the outcomes from many smaller projects do not necessarily transform firm earnings or profits in any directly-measurable way.

By definition, failure on a small project does not jeopardize firm survival.

By some estimates digital transformation spending will top $6.8 trillion by 2023. But those investments are “often made without seeing clear benefits or ROI,” says Tomas Chamorro-Premuzic, chief innovation officer at ManpowerGroup, a professor of business psychology at University College London and at Columbia University, 

Some argue digital transformation failure rates are 70 percent to perhaps 80 percent or more. To be sure, that failure rate includes projects that fail to reach their objectives, but might arguably have some benefits. Still, some argue 73 percent of such projects fail to provide any business value at all.  

While that might seem outlandish, it is well within the parameters of failure rates for less-complex projects such as information technology initiatives, which also fail at about those rates. 

And digital transformation is nothing if not hugely more complex. In fact, it might be so complicated that no single technology change, in any one part of the business, actually captures the magnitude of necessary changes. 

While 85 percent of CEOs accelerated digital initiatives during the pandemic, most can’t articulate their overall strategy and progress beyond that they made a tech investment,” say consultants at Deloitte. 

“If CEOs can’t say their digital transformation resulted in new business advantages or adaptability, then they haven’t really transformed,” Deloitte consultants note. 

source: Deloitte  

Crypto at the Inflection Point?

With the caveat that important consumer technology products do not always succeed, the cryptocurrency adoption curve does presently seem to track use of the internet. Cryptocurrency adoption seems to be a classic S curve.  

source: Wells Fargo 

The important takeaway is that cryptocurrency might be at an inflection point. 

source: World Economic Forum

U.S. Home Broadband Prices Have Fallen in Every Speed Tier Since 2016

U.S. home broadband prices have fallen since 2016, according to a study by Broadband Now. 

Broadband Now says that the average price for internet in each speed bucket starting in the first quarter of 2016 compared to the fourth quarter of 2021 has fallen:

• The average price decreased by $8.80 or 14% for 25 – 99 Mbps.

• The average price decreased by $32.35 or 33% for 100 – 199 Mbps.

• The average price decreased by $34.39 or 35% for 200 – 499 Mbps.

• The average price decreased by $59.22 or 42% for 500+ Mbps.

source: Broadband Now

RFOG as a Bridge to Other PONs

A recent report by Point Topic notes that at the end of 2021, Virgin Media O2 had gigabit per second capability across its entire 15.5 million home footprint.

Openreach passed 5.8 million fiber-to-home locations while three million U.K. premises were passed by independent fiber networks.

Virgin Media premises passed by Gig1 and RFOG broadband technologies

	Premises passed, Dec 2021	Premises passed, Sep 2021	Premises added, Sep – Dec 2021
Docsis 3.1	15,484,086	11,554,960	3,929,126
RFOG	1,002,857	979,457	23,400

source: Point Topic

One point of interest is the access platform Virgin O2 uses for about a million of its passings. Called “radio frequency over glass,” RFOG is useful for compatibility with hybrid fiber coax networks, especially when a node split has to be implemented. 

So RFOG is a passive optical network and is a way to implement DOCSIS services over a FTTH network. 

Although in principle RFOG--as a PON--might be a protocol a cable operator could run longer term, it does not appear that Virgin Media O2 will do so when it converts its HFC and RFOG networks to function as a wholesale network, in addition to supporting its own needs. 

The value of RFOG is its backwards compatibility with HFC. That will not have value for new wholesale customers likely to be most interested in using the wholesale network to support internet access operations. 

And few of those potential customers are likely to have a need for backwards compatibility with HFC or the DOCSIS protocols.

Stablecoins and Disintermediation

Should they come into wider use, stablecoins could disintermediate other financial middlemen. Used either as a store of value or a medium of exchange, stablecoins could allow users to  settle transactions near-instantaneously without using an intermediary that facilitates settlements. 

Many note the value for cross-border settlements, which take time and can be costly. “Firms are also using institutional stablecoins to near-instantly move cash across their subsidiaries to manage internal liquidity, and to facilitate wholesale transactions in existing financial markets, such as intraday repo transactions,” say Gordon Y. Liao and John Caramichael in a paper developed for the U.S. Federal Reserve.  “And finally, because public stablecoins are programmable and composable, they are used heavily in decentralized, public blockchain-based markets and services, known as decentralized finance or DeFi.”

Stablecoins are digital currencies that peg their value to an external reference, typically the U.S. dollar, and are recorded on distributed ledger technologies such as blockchain. 

The potential disintermediation is clear: “If stablecoins were to see broad adoption throughout the financial system, they could have a significant impact on the balance sheets of financial institutions,” say Liao and Caramichael. 

Digitization or Transformation? Sometimes it is a Nuance

Digitalization, the use of digital tools, often is hard to clearly distinguish from digital transformation, the creation of new business models. 

Think of digitalization as the application of technology to the way work gets done. Then digital transformation generally refers to new possible ways of earning money, in the final analysis. 

Are e-commerce businesses or business units an example of digitalization or transformation? Most observers might consider Netflix and Amazon examples of transformation. It might be more subtle. 

Netflix used technology to change its business from subscriptions to a “movie rental” service to an “on-demand video streaming” service. Still, even at the beginning, digitized ordering was used, if fulfillment was physical. 

Keep in mind that on-demand services also were available as part of linear video subscription services that also became “digitalized” prior to the advent of high-definition TV. Though not as elegant or easy to use as Netflix streaming, on-demand delivery was not unique to Netflix. 

Perhaps the big innovation is all-on-demand access, where legacy linear video still is mainly scheduled programming. In that sense, the big Netflix transformation was the shift to 100-percent “on-demand access,” not streaming as such, or internet delivery as such. It is a debatable point. 

Amazon likewise shifted retailing from a place-based activity to online ordering and physical fulfillment. Digitalized ordering was an innovation, to be sure. But “mail order” and catalog shopping had been  well established, before Amazon. 

Amazon digitalized the ordering interface and fulfillment (delivery rather than in-store pickup). Amazon virtualized retailing. Still, in a sense, that is similar to Netflix and its shift to “on-demand” ordering. 

Still, models have changed. Netflix now is a major force in content creation, rivaling the legacy studios. Netflix does not “merely” distribute content; it creates original content. 

Likewise, Amazon was a key leader of  the “cloud computing as a service” shift. AWS now drives Amazon’s overall profits. So Amazon is not just an e-tailer. It is a huge computing services provider. 

We can debate whether streaming or e-tailing are transformations or digitalizations. 

What seems incontestable is that Netflix emerging as a content creator and owner, and Amazon emerging as a computing services giant, are transformations. 

Work processes in most organizations are “digital” to some extent, and quite extensive in most enterprises. 

Customer interactions with firms now are largely “digital,” a new survey sponsored by MuleSoft and conducted by Vanson Bourne and Deloitte Digital finds.

source: MuleSoft 

That does not mean the firms have transformed their revenue models and created new products