"You Get to Keep Your Business" is the Fundamental Value of FTTH

It now is possible to suggest that a fundamental business problem in the internet era affects both mobile and fixed networks. In both cases, the fundamental issue for connectivity providers is the financial return from network upgrades, whether seen in fiber to the home or 5G and future mobile networks. 

Simply, in a competitive market, capital intensity tends to increase as upgrades to fiber access or mobile networks happen. But revenue does not increase to match. Instead, the pattern is that bandwidth supply grows more exponentially, while customer revenue can grow only linearly, at low single digit rates. 

Higher capital intensity with inelastic revenue growth is therefore the key strategic problem. 

It is a bad scenario, when looked at in traditional financial terms. The capital investments, however, essentially are strategic. Many decades ago, a telco executive facing competition from cable operators concluded that the upside of FTTH was not “more revenue” but “we get to keep our business.”

That is not the sort of analysis a financial analyst would find appealing. 

But that is essentially what upgrades to 5G (and future upgrades) mean. More capital-intensive networks must be deployed to preserve what already exists: the ability to serve customer demand in terms of capacity (gigabytes used) and speed. 

Telco upgrades to FTTH essentially represent the same sort of value: consumer and business account market share is protected from predation and loss to competitors. Spending more money to protect what one already has might not sound like a victory. 

But it is far better than the alternative: continued share loss to competitors and ultimately, a non-viable business model. Sustainability and survival, in other words, is the upside. Revenue growth is nice, but survival is essential. 

The basic issue is that end user demand for data increases almost linearly with time, while the amount of money paid to use networks increases only marginally, if at all, in some cases. 

GlobalData, for example, expects U.S. 5G services will generate average revenue per user of $45.56 during 2022, with 4G generating ARPU of $26.41. 

But matters could change. GlobalData expects that U.S. 5G ARPU will be more than double 4G ARPU in 2023. If that happens, it is almost certainly going to be driven by new use cases and revenue streams such as edge computing, network slicing or content services, we can speculate. 

It is hard to imagine that much growth from consumer data plan price increases. Up to this point, much of the ARPU increase has  been driven by customer upgrades to unlimited usage plans. The obvious problem there is that this is basically a one-time source of revenue lift.

By definition, once a customer plan is upgraded to unlimited usage, usage cannot, itself, drive incremental revenue growth. Price increases largely reflecting inflation adjustments will happen, but beyond that, data usage will not drive ARPU growth. 

source: GlobalData 

Mobile operator executives are right to worry about the financial return from 5G. Those networks are more expensive than 4G. But the alternative is going out of business. 

Traditional financial analysis still matters. Firms will be punished if higher capex results in either the same or lower revenue. But the fundamental problem remains: higher capex now is required to preserve the ability to compete for business.

New revenue and use cases ultimately will be found. But those revenues might only compensate for declines in legacy parts of the business. It is an unappetizing prospect, but a realistic possibility. 

FTTH and 5G succeed if service providers continue to operate and continue to generate profits. For the most part, single-digit revenue increases might be the best outcome. That will not be easy to defend if capex increases more than that. But that is the nature of a connectivity provider’s position in the internet era. 

Bandwidth always must increase. Revenue will grow very slowly. The financial returns from increased capex will be paltry. But firm extinction is the inevitable result, if the investments are not made. 

“You get to stay in business,” like it or not, is the strategic driver of capex. “Higher revenue” is nice if it can be obtained. But it is largely adjustments in other parts of the business model that will help drive such results. 

It is fine to question the 5G or FTTH payback model, and to take other steps to support the business model when those investments are made. But traditional investment criteria will be hard to satisfy, without other adjustments of the payback model.

Will Fixed Wireless be the Actual "New Services" Revenue in U.S. 5G Market?

Fixed wireless has always been a niche technology in the U.S. consumer services business. But 5G, in its incarnation as the platform for home broadband, might generate the most-identifiable source of "new service" revenues for 5G.

Even as attention is focused on ramped-up fiber-to-home investment by fixed network providers, 5G fixed wireless might well emerge as the most-significant driver of market share change in the home broadband business in 2022.

Though still a niche platform, that is a significant outcome for any niche technology.

Still, 5G is not the only important driver of behavior in the U.S. mobile industry. Competition is likely causing revenue per account pressure as some mobile virtual network operators and facilities-based providers rely on promotional pricing to maintain share positions or drive account growth. 

U.S. cable operators, arguably the foremost forces in the MVNO market, gained 29 percent of domestic mobile industry phone account net additions in the fourth quarter of  2021, according to MoffettNathanson. 

source: MoffettNathanson, LightReading 

Billing Platforms are Not that Big an Issue, Really

Some retail connectivity provider issues never seem to go away. The old adage that “you cannot sell what you cannot bill for” is correct, as far as that goes. But it also is true that an entity cannot bill for what it does not own or control. 

And that seems the more fundamental problem. Some of you might recall the hope about using telco billing systems to support business partners offering microservices, in the older sense of products costing very little, not the current usage of the architecture upon which modern applications are built. 

Use of telco billing platforms to support third-party applications basically has remained unfulfilled. Part of the issue is that the whole architecture of how apps and services are accessed using the internet has changed the dynamics.

Since app providers do not need an access provider’s permission to conduct business with users and customers, there is scant--if any--value to using a telco billing platform. Usage--as such--tends not to drive monetization models. 

Subscription charges are easily supported using other payment and billing systems. Ad-supported models use a variety of engagement metrics. Commerce models likewise use other established retail payment systems. 

source: STL Partners 

Even if a connectivity provider owns its own industrial automation, gaming, water or electrical utilities, unmanned aerial vehicle systems, operates retail fleet management services provided to third parties or owns monitoring platforms for any range of business operations, the connectivity billing platform is simply not set up to support those types of operations. 

Were a connectivity provider the owner of such assets, such a provider would use the industry-standard and existing rating mechanisms. 

And where a connectivity provider partners with a firm that does offer such services, the necessary rating platforms would be those used by the third parties. There is scarce--if any--need for using the telco rating systems. 

The obvious areas where connectivity providers require new capabilities are for new connectivity services such as network slicing, which might have to support “on-demand” usage capabilities. But that has almost nothing to do with supporting third party applications. 

It seems marketing staffs never are happy with legacy connectivity billing systems. But aside from new connectivity-specific services, there still appears little practical value for new rating systems that support the third-party transactions and products that will use connectivity networks. 

Loosely-coupled architectures have largely made that unnecessary.

 

Demand is a 5G Issue, Not Simply Supply

A foundational claim about any sort of digital divide is that supply is the problem. Networks do not reach everyone; or quality networks do not reach everyone or prices are too high. Those all are supply-side ills.

What often gets confused or forgotten is that there are demand-side drivers as well. Consumers might prefer to buy based on their own perceived needs. Most often, consumers buy home broadband services that are in the middle of what is available, in terms of price and perceived value.

The same thing might apply to mobile services as well.

Where it comes to supply and demand, pundits often assume that slower 5G uptake is to be blamed on supply, not demand. That is not necessarily the case. Subscriber levels for 4G in a few European countries have always been below what we might expect, and availability cannot, at this point, be the main culprit. 

Some might point to lagging 5G uptake and suspect that supply issues are at work. 

source: Ookla 

Customer demand also shapes uptake. Nearly half of all German mobile subscriptions appear to use 3G, instead of 4G. nearly a decade after 4G was introduced, according to a study by Opensignal. 

Governments and policymakers always are quick to quantify supply-based gaps in uptake, quality or availability of communications services, which is among the reasons stories about any form of digital divide are evergreen. 

Most often, studies about service gaps rely on supply or demand indices, including network availability, typical speeds and cost. 

Demand side choices by consumers tend to be overlooked. In other words, some “gaps” might reflect consumer choices, not failures of supply. And that matters for 5G, as much as it did for 4G.

We often are surprised at the resilience of legacy services, as those use of legacy services is always a case of supply failure. Not always. Sometimes demand choices are at work. In other words, a huge percentage of German mobile users seem to be opting to remain on 3G networks even when 4G networks now are in good supply, with good performance metrics. 

T-Mobile Marketing, Not Just Customer Demand, Might Explain Fixed Wireless Growth

One major unknown about fixed wireless using either 5G or 4G has been its ability to take market share from other platforms.

An analysis by Comlinkdata suggests T-Mobile fixed wireless does better in areas where it does not face competition from fiber to home and cable operator hybrid fiber coax networks. Right now that might be presumed to be more-rural areas.

source: Comlinkdata

But T-Mobile marketing behavior also could explain those findings. So far, it seems T-Mboile is marketing in areas where its network has surplus capacity, and that tends to be rural areas.

 5G fixed wireless is a niche, but an important niche for Verizon and T-Mobile as well as wireless internet service providers. In fact, analysts at New Street Research expect more fixed wireless accounts will be added in 2022 than fiber to home accounts. 

source: NSR Data

In fact, there might well be more fixed wireless accounts added than any other type of home broadband connection.

How Important is 5G, Really?

As somebody who has spent lots of time following 5G, I also get the feeling I have seen this before, and I do not mean I have watched 3G and 4G arrive. No, it is something else. 

It is ancient history for many, but I can also recall expectations about the Telecommunications Act of 1996, the biggest change in telecom regulation since 1934 or the breakup of the AT&T monopoly in 1984. 

The Telecom Act essentially focused on opening up voice switch and access lines to competition. But it happened just as the internet was about to become the driving force of just about everything. Note the inflection point in internet usage in North America around 1994. 

source: Our World in Data 

The point is that use of internet apps and services is loosely coupled to the facilities that allow the access. Once access is available--it does not matter who “owns” the access facilities--all lawful apps can be used.

That separation into layers means the impact of internet apps and services is essentially decoupled from the ownership of access facilities. Under monopoly or competitive access provider regimes, the internet grows irrespective of the regime. 

source: W3.org 

The old adage about generals always preparing to fight the last war seems germane here. Policymakers focused on concrete measures to introduce competition by forcing wholesale access to voice services and access loops, expecting that facilities-based competition, lower prices and more service innovation would follow. 

Well, that did happen, though not the way most expected. Even disregarding the internet, telecom services moved to mobility. That is the way most people prefer to use voice services. It is the platform for messaging, social media, coordination, navigation, commerce and content. 

The Telecom Act was largely focused on fixed network change. 

We can argue that the Telecom Act actually did lead to investment in access facilities that make broadband internet apps possible. But we also can argue that widespread mobility adoption and the unregulated competition in that segment of the business has mattered more in terms of innovation, lower prices and greater competition. 

That is the sense I get from 5G. It is better than 4G in terms of performance, to be sure. And its full impact is not yet apparent because we are still early in adoption. 

But I also suspect it will  not matter as much as some hope. With Web 3.0; metaverse; blockchain; crypto; artificial and virtual reality coming, it seems to me 5G will not be as important. 

Just as the Telecom Act might not have produced as much innovation and change as mobility and the internet, so too might 5G be--relatively speaking--less important. 

Connectivity Providers are in a Box

To a signficiant extent, all tier-one connectivity service providers are in the same box: trapped in a highly-competitive business with slow to no growth; with declining profit margins and a "return on investment" problem and lacking the capital resources to make fundamental changes.

AT&T’s forays into media continue to be roundly assailed, but illustrate the problem.

The recent acquisitions and divestitures of DirecTV and WarnerMedia bring to mind earlier “grow the company” efforts that were focused on the core connectivity function, and also cratered, for arguably the same reason: AT&T’s debt burden was too high. 

The strategy might even have been correct, but AT&T could not survive the debt-fueled strategy. And keep in mind "AT&T" has failed in two incarnations: first as a long distance company trying to create local loop facilities; the second time as an integrated provider trying to move beyond a reliance on connectivity revenues.  

In the late 1990s, AT&T made a big move into cable TV, partly to fuel its move into local access services, partly to capitalize on the robust cash flow cable TV was then generating. 

Given the success cable operators have had with broadband access and support for voice services (the networks of the early 1980s were one-way) show the strategy was not wildly off the mark. 

On June 24, 1998, AT&T acquired Tele-Communications Inc. for $48 billion, marking a reentry by AT&T into the local access business it had been barred from since 1984.

When AT&T bought Tele-Communications, the objective was to use those assets to create a national broadband access capability which AT&T did not at that time possess. Recall that the 1983 divestiture of monopoly AT&T created seven local access companies--the “Baby Bells”--while restricting AT&T to long distance. 

When, in 1996 the Telecommunications Act opened all telco markets to competition, AT&T was faced with the challenge of creating a facilities-based local access network capability. That it failed to do so successfully is not too surprising, given the cost of creating an almost-nationwide broadband infrastructure. Think of the continuing cost of creating fiber to home networks nationally. 

Having concluded it had neither the time nor the money to create access networks nationwide, AT&T gambled on upgrading TCI’s cable networks. But the strategy was not the issue, the debt was. 

AT&T also bought Teleport Communications Group, a $500-million-a-year local business phone company, for $13.3 billion; MetroNet, a Canadian phone system, for $7 billion; and the IBM Global Network, which carries data traffic, for $5 billion, as parts of a move into local access. 

But the debt burden was too high and AT&T reversed course in 2004 and sold most of those assets. AT&T Broadband (the former TCI and US West Broadband assets) were sold to Comcast, making that firm the biggest U.S. cable TV company. 

The point is that AT&T could not figure out a way to quickly create a massive facilities-based local access network capability to compete with the Baby Bells and all the other newcomers, after passage of the 1996 Telecom Act. 

As a related issue, AT&T was not able to replicate the success later shown by Comcast in diversifying its product lines beyond the legacy. Comcast now earns significant revenue from content ownership, subscription video, home broadband, business services and voice, where it once relied exclusively on cable TV subscriptions.

AT&T hoped to replicate that feat. Yes, the strategy failed, twice. 

Few--if any--observers note that AT&T has twice been the largest linear video provider in the U.S. market.  The first foray in the 1990s made AT&T the largest cable TV company in the U.S. market. 

The second foray was the purchase of DirecTV, which again made AT&T the largest supplier of linear video subscription services in the U.S. market. 

At the same time, few can recommend any strategy for AT&T--or the other big connectivity providers--that lifts revenue growth beyond a few percent a year. Connectivity is a slow-growth business. If higher growth rates are desirable, that growth almost by definition has to come from outside the traditional connectivity role. 

No firm in the global telco-legacy connectivity industry has really succeeded wildly in that regard. 

By 2005 AT&T itself was acquired by SBC Communications, which promptly rebranded itself AT&T. Yes, AT&T has twice failed to innovate itself out of a box. But it is a box that has imprisoned virtually all global connectivity providers. 

From time to time a segment of the industry, in some regions, is able to grow--for a time--at fast rates. Quite often that growth only compensates for losses in other parts of the business. Mobility growth balancing declining voice revenues is the best example. 

The internet has made matters worse, further limiting the value and revenues connectivity providers can reap while driving value “up the stack” to third party providers. 

Those who castigate AT&T for its strategic failures are too harsh. Debt has been the issue, as the firm never could afford to spend enough, fast enough, to solve its local access problem, or its revenue source problem. 

If any of us were asked whether AT&T could afford to build a national FTTH network--within 10 years--we would rightly doubt it was possible. Even if it had the money, it did not have the time. 

No single firm could afford to spend $300 billion over 10 years to connect even 100 million homes, which is the scale of the problem AT&T faced. 

The first failure was experienced by AT&T the long distance company. The second failure was that of the former SBC Communications, rebranded as AT&T. It always was an unsolvable problem.

What is Digital Twin?

A digital twin is a virtual model of a process, product or service. It allows analysis of data and monitoring of systems. It can be used to identify problems before they even occur or prevent downtime in any process industry.

In other cases, object or system behavior can be simulated, to test "what if" scenarios. Some with long memories will remember how the spreadsheet allowed financial analysts to make "what if" changes to parts of business models, to see the impact of such changes.

In the early days of personal computing, the spreadsheet is what created the value for businesses to buy PCs. Digital twins should be the same sort of process.

Will Web 3.0 Fail to Meet its Potential?

Web 3.0 often is said to be “decentralized,” featuring applications based on open-source, trustless, and permissionless blockchain networks. If that sounds much like the direction of the present web, that is correct.

We now routinely use open source. The whole internet operates on a "trustless" and "permissionless access basis. But all that will be extended.

Web 3.0 is said to rely on: 

• Blockchain

• Crypto assets

• Low code or “no code” app development

• Artificial intelligence

• Metaverse or extended or virtual reality

• Users able to monetize their data

• Semantic capabilities (machine-readable data)

It also is reasonable to argue that if Web 3.0 develops, it will build on edge computing as well, simply because the sheer amount of data updates--in real time-- for any immersive experience will require high-performance computing very close to the end user. 

source: GlobalData 

As with the original development of "Web 1.0," proponents had grand dreams about universal sharing of knowledge and information. Web 3.0 is pitched by some as a return to such principles. But we are likely to find that matters will not evolve in the ways proponents hope. Web 2.0 has been effectively balkanized by huge firewalls, where some apps are simply prohibited by government authorities. 

And much content is monetized precisely by putting it beyond paywalls. Web 1.0 might have been about communication. Web 2.0 has been about commerce and content. We still do not know how Web 3.0 will play out. 

source: Elastos

What Metaverse Requires of Connectivity and Data Center Suppliers

“The metaverse may be the next generation of the internet,” say researchers at Citi. “Use cases may include everything we use the internet for today with gaming, commerce, art, media, advertising, smart manufacturing, health care, virtual communities, and social collaboration, including for enterprise and education.”

source: Citi 

But the digital infrastructure is not yet ready to support metaverse platforms, looking only at application latency performance. Today’s cloud-based gaming, for example, sports end-to-end latency of between 75 milliseconds and 150 milliseconds. 

But metaverse persistent and immersive  environments will require end-to-end latency more on the order of 12 ms or less. 

source: Citi 

And though we often think of metaverse as something a user accesses using virtual reality goggles, there is good reason to believe metaverse use cases are more likely to happen using smartphones. The point is that value is not based strictly on three-dimensional graphics but “immersion” more generally. 

“You can think about the Metaverse as an embodied internet, where instead of just viewing content, you are in it,” Mark Zuckerberg, Meta CEO, has said. “And you feel present with other people as if you were in other places, having different experiences that you couldn’t necessarily do on a 2D app or webpage.”

So think of “immersion” more than 3D, “realism” more than “avatar.” 

For digital infrastructure providers (narrowly defined), metaverse means investments in latency performance and bandwidth, above all. And that means edge computing, faster broadband and the ability to support untethered devices indoors and outdoors. Wi-Fi will play a part, but so will mobile networks.

SMB IT Priorities are Mostly about Remote Work Support

A survey by Analysys Mason of 1149 of small and mid-sized businesses in Germany, Singapore, the UK and the United States almost predictably suggests those firms will rely more on information technology going forward. In some part, that is because firms expect continued work from home deployments that arguably increase IT support. 

source: Analysys Mason 

Respondents expect roughly 40 percent of employees will work from home for at least some of the time once the Covid-19 crisis is over. This will drive demand for personal computers and mobile devices as well as cloud-based solutions to support remote workers and applications. 

It is probably worth noting that although many use the term “digital infrastructure” to mean connectivity networks, data centers and towers, in the SMB space it is devices and apps that are “digital infrastructure” in a practical sense, as is the case in consumer markets. 

Consumers and SMBs--no less than enterprises--use apps, services and devices. Their “digital infrastructure” is apps and devices. Only on the producer side of the value chain is there a distinction made between devices, apps and “networks and data centers.”

source: Analysys Mason 

From an SMB perspective, IT goals will be to support remote workers and protect apps and devices from hackers or data breaches. 

source: Analysys Mason 

Small firms are defined as having one to 99 employees while mid-sized firms have 100 to 999 employees.

Most Institutional Investors Will Hold Digital Infrastructure Assets

institutional investors now view tower and other digital infrastructure assets in the same way they once viewed real estate holdings. Traditionally, real estate was viewed as an asset with predictable and strong cash flows and a lower correlation with equity markets. Also, such assets are believed to be more protected from inflation. 

source: OECD

In other words, institutional investors now view digital infrastructure in the same way they view transportation, energy and other utility assets. 

Infrastructure assets are commonly used to diversify portfolios. 

As with utilities, barriers to competition were important. Over the past few decades, digital infrastructure assets have also been “de-risked” to a large extent, moving them closer to the traditional real estate model. 

source: Schroders 

In search of yield, infrastructure investors also are taking a more-active stance in management, where they might previously have limited their scope to investment-only approaches. Some 80 percent to 90 percent of institutional investors express interest in digital infrastructure assets.  

Though some digital infrastructure investors are active only in “hard” assets such as towers, data centers and networks, others view the broader ecosystem as including applications and services plus devices. 

source: Asian Infrastructure Investment Bank

That view of “hard and soft” is essentially “tangible and intangible” parts of the infrastructure ecosystem. 

source: LBBW

Telco Infra Suppliers Slowly Change

Some changes in telco infrastructure sales in any given year in the fraction of a percent range would not surprise anyone. What might be notable is Amazon appearing in the top 10 of infrastructure suppliers with share gains in the top four. 

As you might expect, given the shift to open source and virtualized platforms traditional suppliers lost a bit of share. Ericsson, Nokia and Huawei all lost share in 2021. 

source: MTN Consulting 

source: Statista 

Huawei continues to lead annual sales, followed by Nokia and Ericsson. 

source: MTN Consulting