EU Looks at Allowing ISPs to Treat"Some" App Providers Unequally

Network neutrality has always been a slippery, impossible to define concept, notable more for its help or hindrance to business models of various participants in the internet ecosystem. Under the rubric of “treating all bits the same,” policymakers and advocates have prevented quality of service mechanisms for consumer internet access; blocked the access equivalent of “toll free” calls and generally imposed effective price regulation on internet access providers. 

All that despite the fact that application providers routinely pay money to ensure that their own bits are “not treated the same,” using content delivery networks to circumvent public internet routing delays and uncertainty. 

Now, in an ironic twist, European Union regulators are looking at imposing just such “unequal treatment of bits” on a handful of large application providers. 

Allowing ISPs to extract fees from some app providers for the privilege of allowing bits to be delivered over ISP access networks. 

One if almost forced to conclude that the network neutrality debate was never about equal treatment; equal access or anything else related to the delivery of bits over ISP access networks. 

It seemingly always was about the perceived revenue and cost advantages and disadvantages faced by various ecosystem participants. It is hard to reach any other conclusion given the extreme range of regulator opinions.

First, “equal treatment” to benefit app providers. Now, “unequal treatment” to benefit ISPs. In addition to all that, there are other political concerns, principally the impact of policies on domestic suppliers of apps, content or access. 

If we are honest we will stop pretending “network neutrality” had much to do with “protecting bits from discrimination,” and recognize it was a political move designed to help or hinder some parts of the internet ecosystem, just as it now--in reverse--is similarly designed to help or hinder ecosystem participants. 

In the latest incarnation, it is ISPs who need “revenue help.” The business simply is not growing in Europe, and ISPs seemingly have won the argument that it is they who need help, not app providers. 

source: ETNO

As often is noted, app providers have enjoyed revenue growth, while ISPs have seen their revenue shrink since the early 2000s. 

 

source: ETNO

The point is that network neutrality is shown to be a sham. The new proposals will impose unequal treatment of bits. It is the exact opposite of “net neutrality,” whatever that was supposed to be, and to some of us the concept never had integrity. 

The same people who argued for “equal treatment of all bits” also agreed that sometimes ISPs would have to treat bits unequally to preserve network performance. 

Maybe the better advice would be to stop picking winners and losers under the charade of some sort of “fairness” or “equal treatment.” It appears to be nothing of the kind. Instead, we have governments picking winners and losers for political reasons.

If You Hate Meeings, Do Not be a CEO

Frustrating though it might be, CEOs of larger organizations spend very little time with customers: about three percent, according to a survey conducted by Harvard Business School professors Michael Porter and Nitin Nohria in 2006. 

About 72 percent of CEO time was spent in meetings.

Broadly speaking, no more than 21 percent of CEO time was spent on anything connected with business strategy. About a quarter of time was spent on function or business unit reviews and another 25 percent on “people and relationships.”

About 16 percent of time dealt with “organization and culture issues.”

source: Harvard Business Review

Does Crypto Intrinsic Value Matter?

Some believe intrinsic value does matter, and crypto currencies do not possess such value. Others make the argument there is intrinsic value. 

It matters as crypto's role and value in coming Web 3.0 and metaverse use cases might hinge, to some extent, on user belief in such intrinsic value. 

The Digital Divide Will Not Always be a Problem

Scarcity--both real and imagined--drives the prices and perceived value of nearly all products and services. “Lack of” also drives the political agendas of virtually all organizations and entities who promote an agenda. 

Those organizations require resources to operate, and resources mean jobs, prestige and power. So what happens when a “problem” is essentially solved? Do organizations disband, or do they find some other “new problem” to work on, thus inviting continued support of the entity?

Almost always, the latter is chosen over the former. So we can virtually predict that, eventually, policy proponents are going to stop talking about the “digital divide” and move on to some other problem related somehow to “inability to buy broadband internet access.”

Already, many point to “digital literacy,” which is a demand issue, not a supply issue, as a substantial remaining problem. In other words, it is not the quality of the available broadband access that limits use, it is the skills of potential users. Faster broadband does not fix that impediment. 

But to the extent that generational differences exist, that problem eventually fixes itself. Younger generations are more comfortable with all new technologies than older generations, and as each generation passes, the “lag” evaporates. 

There will likely always be “differences” in available speed, latency, reliability or price between remote areas and urban areas, to be sure. Summer fruits and vegetables cost more, and are less fresh, in the winter. 

Still, at some point, internet access is going to be good enough that bottlenecks to experience and value will shift elsewhere in the ecosystem and value chain. 

Where servers are located; what customer premises gear is needed; how pricing and packaging models are crafted; which indoor transmission platforms are operating and processing speed and power could well determine whether internet apps, services and devices work at all or work properly. 

Most are now too young to have encountered it, but back in the 1980s global communications policymakers actually were concerned about how to create “voice access” platforms for most people, as “half the people have never made a phone call.” That might have been true in the 1980s or even 1990s. It no longer is true. 

We have “solved” the problem of humans having access to voice communications. We likewise will solve the “digital divide” in a meaningful sense: not defined as absolute parity of speeds, latency or cost per bit, but in the sense of “access” no longer being a barrier to usage. 

And that will lead a whole bunch of people and organizations to find some other new problem to solve.

Will Significant 5G Revenues Come from B2B? Maybe Not

The conventional industry wisdom is that incremental new 5G revenues will come from business customers, not consumers. The bad news is that, in some regions, those new business-related 5G revenues might be quite small, by 2025.

You would be hard pressed to find any observers who do not believe edge computing, private networks and network slicing will lift revenue for mobile operators over the next decade In the Asia-Pacific or any other region.

The only question is the magnitude of those increases. And that is where matters get tricky. Some forecasts suggest sharp drop offs in Asia-Pacific mobile revenue through 2025, compared to trends up to 2019. 

But most forecasts call for revenue in the range of $230 billion to $390 billion by about 2025, with total revenue--fixed and mobile--closer to $500 billion in the region. 

If 5G revenue earned by mobile operators in the Asia-Pacific region by about 2025 reach $24 billion, then 5G would represent between six percent and 10 percent of mobile operator revenues.

If one assumes that consumer mobile connections represent 90 percent of 5G revenue in 2025, and using the higher figures of $24 billion in 5G revenue, then edge computing, network slicing and private networks together would only represent perhaps $2.4 billion in revenue.

That is a small amount contributed by three new revenue sources. 

But some believe 5G might contribute less, perhaps contributing $14 billion in mobile revenues  by about 2025. In that case, 5G would represent between four percent and six percent of mobile operator revenues in 2025. 

In that case network slicing, private networks and edge computing would be negligible revenue contributors, generating perhaps 1.4 percent of mobile operator revenues. 

At such levels, the impact of changes in subscription volume, average revenue per account, increases in internet access revenues and market share changes will have far more impact on mobile operator revenues than network slicing, edge computing and private networks.

How High is Home Broadband Churn?

If we can assume a monthly churn rate for home broadband of about two percent a month, annual churn could reach nearly 25 percent of the installed base. As often is the case for consumer surveys, behavior might not match stated intentions. 

source: TiVo 

Those stated intentions seem out of line with actual monthly churn rates in developed markets, which seem to hover between 0.75 percent and 1.25 percent per month. That suggests annual churn in the range of 12 percent of the installed base. \

source: Analysys Mason 

Metaverse is a Decade Away

Some technology transformations are so prodigious that it takes decades for mass adoption to happen. We might point to artificial intelligence or virtual reality as prime examples. Now we probably can add Web 3.0 and metaverse to that list. 

At a practical level, we might also point to the delay of “new use cases” developing during the 3G and 4G eras. That is likely to happen with 5G as well. Some futuristic apps predicted for 3G did not happen until 4G. Some will not happen until 5G. Likely, many will not mature until 6G. 

The simple fact is that the digital infrastructure will not support metaverse immersive apps, as envisioned, for some time. Latency performance is not there; compute density is not there; bandwidth is not there. 

In fact, it is possible to argue that metaverse is itself digital infrastructure, as much as it might also be viewed as an application supported by a range of other elements and capabilities, including web 3.0, blockchain and decentralized autonomous organizations, artificial intelligence, edge computing, fast access networks and high-performance computing. 

source: Constellation Research 

Scaling persistent, immersive, real-time computing globally to support the metaverse will require computational efficiency 1,000 times greater than today’s state of the art can offer, Intel has argued. 

To reduce latency, computing will have to move to the edge and access networks will have to be upgraded. 

All of that takes time, lots of capital investment and an evolution of business models and company cultures. Metaverse is coming, but it is not here today, and will take a decade or more to fully demonstrate its value. Major technology transformations are like that.

Web 3.0 Will Not Prevent the Rise of Powerful New Platforms

Many would argue that since Web 3.0 is the future of the internet, and since blockchain is among the key enablers of Web 3.0, that blockchain is therefore the future of the internet. We might at least agree that blockchain is part of the foundation of the future internet, as we might argue for artificial intelligence, edge computing or the metaverse. 

One of the principles of Web 3.0 is that it is more distributed, in terms of ownership of data. That is inherently part of the design of blockchain, so there is a clear logic there. Some proponents of Web 3.0 also tout some other possible advantages, including user ownership of their own data. 

Many argue that decentralization will prevent the rise of new gatekeepers that have been a criticized feature of Web 2.0. And this is the tricky part. It remains unclear whether technology decentralization necessarily leads to dispersed power within the ecosystem, or not. 

Keep in mind that the internet is, by design, similarly disaggregated. Owners of apps and services do not have to own networks to reach their users or customers. Functions within the ecosystem similarly are disaggregated. The use of layers allows a modular approach to supplying and upgrading functions. 

At least in principle, any end user can reach any other end user, so long as that is lawful. But it does not seem likely that new platforms will be prevented from arising. Though any entity can use blockchain, that does not prevent the rise of new platforms, any more than leaders can be prevented from emerging in any industry.

The existence of a public road, rail, airline or other infrastructure does not prevent the emergence of auto, airline or electrical and energy leaders. Blockchain might, in some cases, eliminate “middle man” functions for commerce, content or application supply. 

But that disintermediation does not prevent new platforms from emerging. Suppliers will still exist. And some suppliers will gain leadership of markets. Efficiency is the benefit of blockchain: it allows disintermediation.  

source: WallStreetMojo 

But disintermediation in no way prevents the rise of powerful platforms. It simply allows greater supplier efficiency. So though some believe Web 3.0 necessarily prevents the rise of centralized power on the internet, some will disagree. In any market, for any product or service, leaders emerge. The databases, currencies and technologies we use do not seem to affect such processes.

Is Growth an Unsolvable Problem for Service Providers?

Virtually all observers praise AT&T's "return to connectivity" as the fundamental business strategy. Some hail a new era for the company. Others might point to aggressive marketing tactics that could be hard to sustain longer term, even if they work in the short term.  

But monopoly market dynamics are fundamentally different from those with competition. Slow growth is not a problem for a regulated monopoly that earns a guaranteed--if low--return from investments made with almost zero risk. 

But that same business is fraught with danger in a competitive situation, where profit margins are squeezed; bad investment choices have real consequences and new competitors reduce the effective size of the market any single firm can grab. 

The simplest analogy: in a monopoly market the theoretical share is nearly 100 percent. In a competitive market with two competent suppliers the theoretical market share is 50 percent, In a market with three competent suppliers theoretical market share is reduced to 33 percent of total. 

In practice, a stable competitive market often will have a 4:2:1 pattern of market share among the top-three firms.  

In a mature competitive market it is conceivable that one supplier gets 50 percent share; a second 25 percent; a third 12.5 percent and the rest is divided amongst scores to hundreds of suppliers. But the biggest three suppliers can have close to 90 percent share. 

Few--if any--national communications markets have reached that shape, which suggests the markets remain unstable. 

The access business (voice, internet access, messaging, mobility) has other problems, though. Competition has meant declining profit margins; a lower return on invested capital and, often, lower average revenue per account over time. Revenue growth also is a persistent issue.

And that is the fundamental conundrum big access companies (telcos, cable TV, other ISPs) face. Competitive access markets feature low rates of growth; ARPU pressures; profit pressures and low rates of financial return on invested capital. 

“Sticking to the basics” (connectivity services) was always a low-growth business in the monopoly era. In the competitive era it often is a “close-to-zero growth” or even “negative growth” sort of business. 

That remains a key issue for connectivity providers that “sticking to the core business” does not necessarily solve. Market share gains and losses will remain a key variable under conditions where big gains in ARPU are close to impossible.

Wireless Power Delivery: Kilowatts at a Kilometer

Yes, substantial amounts of electiical energy can be converted into microwave radio frequencies and delivered without wires. 

Monetization of Higher Data Consumption Remains a Key Issue for ISPs

Virtually all internet service providers worry to some degree about monetizing growing data consumption on the part of their customers. But monetization is a bigger problem in some markets than in others. 

If consumption and revenue were strictly linear, as once was the case for long-distance telephone communications, the highest usages would correlate with the highest revenue, all other things being equal. Looking at mobile ARPU, some markets including India and South Africa show the monetization issue.

soruce: Cisco, Kagan Research 

In most markets, though, monetization is sticky on the revenue side. Average revenue per user might not increase as usage grows. To remain viable under such circumstances, an ISP must reduce costs per delivered bit or find additional revenue sources with higher profit margins and stronger revenue growth profiles. 

Who is the "Speaker?" The Platform or the User? Does it Matter?

Free speech always has been a difficult and complicated subject in the United States. Time, place and manner restrictions have been upheld as lawful. But the First Amendment to the U.S. Constitution only binds the federal government. 

The Amendment says “Congress shall make no law. respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

Over time, many have emphasized a few key words. It is “Congress” that can “make no law” regarding the “establishment” of any religion or abridging “freedom of speech” or “press.” 

The Constitution therefore restricts the federal government, not other entities, jurists have concluded. But the meaning of “make no law” has been debated. Though intended to protect political speech, the courts have, over time, concluded that other forms of expression with political implications also are protected.

All those issues now are complicated, many would argue, by suppression of political speech by social media platforms. To be sure, such entities are not bound by the First Amendment to the U.S. Constitution. Neither are newspapers, radio stations or other publishers of content. 

But such issues have been raised before. Consider the issue of “who is the speaker whose rights are protected? In the 18th century the right was said to be held by the owners of printing presses. In the 21st century it is social media platforms. 

But where jurists might agree that a newspaper is a “speaker” for reasons of protection, who is the “speaker” on a social media platform? Is it the platform (which insists it is not responsible for the views expressed on its sites) or the users of the platform? 

And, to be sure, in either case, no matter which definition is used, the constitutional protection of speech might not apply. The platform, speaking for itself as a legal entity, has the right to express its own views. What is unclear is whether, for all other purposes, the views expressed on the platform are distinct. 

Though courts have refused to consider private property venues areas of protected speech, that arguably remains an issue. In other words, is a major social media platform the equivalent of the village commons. So far, courts have not agreed. 

Still, naked suppression of political speech arguably rankles most people. And at least so far, none of the historical precedents seem to provide much room for adapting First Amendment law to 21st century political speech. 

"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.