Business Case Drives Platform Choices, Always

Fixed network next-generation platform choices are virtually never as “easy” as choices possible for mobile networks. For starters, mobile platform choices are always global and unitary: there is one standard to replace the prior standard. 4G is replaced by 5G as 5G will be replaced by 6G. 

In the fixed networks segment there always are multiple choices. Cable operators have multiple architecture choices when driving optical fiber deeper into the network, or can switch platforms entirely and replace hybrid fiber coax with fiber to the premises. Then there is the timetable: upgrade HFC now and then switch to FTTP later versus moving directly to FTTP. 

Fixed network operators have several choices of FTTP platform as well. Capabilities are one matter, but deployment cost; business strategy; expected financial return; capital investment and expected level of competition all are issues to be considered. 

source: Broadband Library 

When an immediate upgrade from copper is envisioned, some might argue XGS-PON is more future-proof, if more costly. But scale matters, in some instances. Capex for one choice that is four to five times that of the other relevant choice can be a powerful incentive. 

Split ratios and the number of wavelengths also might be considerations if one platform has range significantly different from other platforms. A network architect might require more wavelengths per fiber if longer distances are covered, to support dropping wavelengths along the route to serve enterprise or other high-volume customers. 

source: Medium 

In all cases, though, the business case influences platform choices. "First installed cost" is never the only consideration.

Switching Locations Lose Relevance for Network Architectures

Of all the changes in fixed or mobile network architectures over the past few decades, one of the notable physical layer changes is the application of optical fiber more densely in distribution and access networks.

But also noteworthy is the disappearance of switching or computing locations as demarcation points.

In the past, we could always demarcate the access network from the distribution network at a central office or rermote terminal location. That makes less sense these days, as processing is increasingly distributed.

Both fixed and mobile networks use similar architectures in the core network, diverging mostly in the access network. Core network transport these days always uses optical fiber media. Transport networks (sometimes known as distribution networks) that move traffic from the access network to the core network also are commonly based on optical fiber platforms. 

source: Dgtl Infra 

Access networks that move traffic from customer sites to transport aggregation points rely on different media (cable versus wireless radios). 

The other common change is that both fixed and mobile networks can be described without reference to places where processing operations occur. In virtualized and distributed networks, that can happen at many different places. 

In past days transitions between portions of the network would happen at processing locations such as central offices, which traditionally terminated the access network. These days, processing no longer is a consistent demarcation point between network segments (core, transport/distribution and access).

Covid Lockdown Productivity is an Illusion

A study by economists Robert J. Gordon and Hassan Sayed argues “the pandemic appears to have created a resurgence in productivity growth with a 4.1 percent rate achieved in the four quarters of 2020.”

In other words, while many office and retail workers were working from home, productivity accelerated, the study says. Some will take that as confirmation that work from home actually does raise productivity. 

Maybe not. “We use the data to show how severely the quarterly pattern of aggregate productivity growth is distorted in 2020 by the change of the industry mix in which low-productivity industries suffered disproportionate losses of output,” say the National Bureau of Economic Research researchers. 

To be sure, the 2020-22 average productivity growth rates of 17 industries are highly heterogeneous, ranging from +10 percent to -9 percent at an annual rate.

“To provide insight, we divide the 17 industries into three groups: goods, work-from-home (WFH) services, and contact services,” the researchers say. “We show that WFH industries account for more than all of the positive productivity growth during 2020-22.”

What must be explained is productivity growth as output plummeted. The answer appears to be that “the apparent countercyclical behavior of productivity in 2020:Q2 reflected not a sudden outburst of creative innovation, but rather in large part a shift in the mix of output and employment toward higher productivity sectors of the economy,” the authors say. 

“While output and employment dropped everywhere, they declined at a much faster rate in the sectors where labor productivity and wages are relatively low,” say Gordon and Saved. 

“This shift in the industry mix reflects a relatively large decline in the employment of workers in low-paid industries where work involves close contact among employees, customers, or both, such as bricks-and-mortar retail trade and leisure/hospitality, and a relative increase in the employment of workers who could continue to work at home in relatively high-paid industries such as finance and information technology,” they note. 

In other words, we simply subtracted low-productivity workers from the sample, leaving a higher preponderance of “high-productivity” workers in the sample. 

Leave aside for the moment the question of whether knowledge worker productivity actually can be measured. The boost in productivity documented here actually results from removing substantial portions of the low-productivity workforce from the statistics. 

So average productivity rose, even if much of the real economy was shuttered. 

The point is that we need to be careful about claims that work from home actually increased productivity. This study only confirms that lots of low-productivity employees were out of work. We actually know very little about WFH productivity effects.

What is a "Problem" and What is a "Success?" Sometimes They Get Confused

Can you name a single government program that achieves 99 percent of its goals? And if any such program achieves 99 percent of its actual numeric goal, does it make any sense to say such an outcome is not worth cheering? 

Where it comes to home broadband, if you pay attention to the actual numbers, the “unconnected” problem is a “last two percent of locations” issue, and always is. The actual size of the “cannot buy broadband” problem also is definitional. There are almost no continental U.S. home locations where internet access at “broadband” speeds is unavailable, if one includes satellite access among the relevant platforms. 

That is why home broadband availability suffers in areas with lots of rural households and also tends to be best in urban areas. 

In fact, one often sees descriptions of home broadband that are examples of innumeracy, such as the claim that 0.2 percent represents “so many” locations when it actually represents “so few.”

On the other hand, customer choice also is disregarded, though it is a huge factor in choices made about whether to buy home broadband services. 13 percent of households say they do not want to use the internet. 

In addition to that, at least 15 percent of U.S. residents report they are mobile-only for their internet access. Assume that equates to about seven percent of households. 

So add up those two categories--do not want to use the internet and use mobile for internet access--and you have as much as  20 percent of U.S. households that have good reasons for not buying home broadband services. 

“Availability” is far less an issue. 

The key issue is the oft-repeated insistence that something is a “big problem” when perhaps that is not the case. Problems can exist, and still not tell the story. One percent and two percent issues remain issues. But that should not obscure the main story, which is that 98 percent to 99 percent of instances are perhaps not problems at all.

Orange, Masmovil in Spain to Merge Their Assets

A merger of Orange and Masmovil in Spain will create a new entity with about 25 percent share of the access business revenue in Spain (both mobility and fixed network services). 

At least some observers believe the proposed deal with provide clues about regulator willingness to allow more consolidation in EU markets that reduce the number of main competitors from four to three. 

The deal would create a telecom market with three leaders: Movistar (Telefonica), the new firm and Vodafone.

source: CNMC 

The firms are likely to make the argument to regulators that the deal should be approved to allow the new firm, jointly owned by Orange and Masmovil, to speed up investments in 5G and next-generation platforms.

Home Broadband Resisters: Mobile and "Not Interested in the Internet" are the Big Issues Now

Can you name a single government program that achieves 99 percent of its goals? And if any such program achieves 99 percent of its actual numeric goal, does it make any sense to say such an outcome is not worth cheering? 

Where it comes to home broadband, if you pay attention to the actual numbers, the “unconnected” problem is a “last two percent of locations” issue, and always is. The actual size of the “cannot buy broadband” problem also is definitional. There are almost no continental U.S. home locations where internet access at “broadband” speeds is unavailable, if one includes satellite access among the relevant platforms. 

That is why home broadband availability suffers in areas with lots of rural households and also tends to be best in urban areas. 

In fact, one often sees descriptions of home broadband that are examples of innumeracy, such as the claim that 0.2 percent represents “so many” locations when it actually represents “so few.”

On the other hand, customer choice also is disregarded, though it is a huge factor in choices made about whether to buy home broadband services. 13 percent of households say they do not want to use the internet. 

In addition to that, at least 15 percent of U.S. residents report they are mobile-only for their internet access. Assume that equates to about seven percent of households. 

So add up those two categories--do not want to use the internet and use mobile for internet access--and you have as much as  20 percent of U.S. households that have good reasons for not buying home broadband services. 

“Availability” is far less an issue.

Garbage In, Garbage Out

Not every job can be done remotely, and perhaps we should also recognize that though employees like it, productivity is not necessarily improved or maintained when workers are full-time remote. What is true “in the office” is likely also true “out of the office:” 80 percent of total worker value is created by 20 percent of the activities at work, and perhaps also by 20 percent of the workers. 

It is too easy to blame insecure bosses for resistance to remote work. Even younger CEOs are expressing concern about the productivity impact of remote work, though some claim there is evidence of enhanced productivity. 

We can say with some certainty that people prefer working remotely. But that is a different issue than whether productivity is better, the same or worse. Employee satisfaction often is higher with remote work, but that also is not the same as asking whether workers are more productive. All we know is that they report being happier. But they also might be distracted. 

Also, we cannot be sure that team productivity is positively or negatively affected, even if we think we have some sense of individual productivity.    

In truth, since knowledge worker productivity is exceedingly hard to measure, all we often have are opinions of workers who claim they are more productive. Some cite email activity or meetings as evidence that productivity has not dropped. Some of us will question whether measuring email volume or number of meetings attended as useful measures of business outcomes, though.

In fact, it might be fair to say we do not really know what has happened to productivity as lots of office workers went remote. Productivity might be higher for some; the same for others and lower for some significant number of people. 

Much will hinge on the type of work done, the personalities of the actual people, the phase in career, and the amount of value random collaboration actually creates. 

 Remote work is not  going to go away, but it might not grow as much as much expect, either. The bigger issue is what we think we are measuring when trying to assess productivity. The adage “garbage in, garbage out” applies.

Congratulations Denmark

Congratulations (coming Sunday) to Denmark. Jonas Vingegaard is one step closer to winning the 2022 Tour de France after he extended his overall lead with a stunning stage 18 victory. A Danish rider last won the Tour de France in 1996. 

In a head-to-head battle with defending champion Tadej Pogacar, Vingegaard waited for his rival after Pogacar crashed. Sportsmanship! 

How Do You Compete with "Free?"

Why, over the past couple of decades, have connectivity service providers been so concerned about over-the-top application providers? In large part, because the change from a closed telco value stack to an open internet value stack both devalues traditional telco products and enables new competition. 

Put simply, “it is hard to compete with firms that give away what you sell.”  It also is hard to compete with providers who are willing to sell “at cost.” Consider the way “triple-play bundling” has worked in the fixed networks business. 

While it is true that both incumbents and attackers have used the bundling strategy, they have done so for different reasons. In nearly all cases, some services have been the equivalent of retailer  “loss leaders.” 

Telcos have been much more concerned with “merchandizing” video services to protect voice service revenues and profit margins, while cable TV operators have been more willing to merchandise voice services or mobile services to protect legacy video revenues. 

These days, most fixed network service providers hope to merchandize almost anything to protect home broadband market share, revenue and profits. 

Mobile service providers, on the other hand, want to protect broadband data access revenues and merchandize voice, text messaging, phones and video or content. 

In other words, can you compete with "free?" That complaint lies at the heart of issues connectivity service providers have had with over the top edge providers or app providers. 

For communications service providers, the issue has arisen mostly in conjunction with low cost or “free” services such as Skype or WhatsApp that supply voice or messaging services “at no incremental cost,” once a user has suitable devices and Internet access.

That has led many to say the economics of abundance makes new revenue models possible. Some would say “abundance,” a relative term, makes new models essential, in at least some cases. But the implications are startling.

The basic idea is that transistors, storage, computation and bandwidth are so abundant  the cost of their use--and digital products built on them-- is a price very close to zero. 

The corollary is that businesses based on the use of such resources can be viewed differently from businesses where physical  inputs are necessary and relatively expensive.

In other words, businesses based on abundant inputs can "waste" those resources. In a pre-broadband, pre-Internet-Protocol era, unicasting (content on demand) would have been nearly impossible. That is why video entertainment was broadcast or multicast. 

The same sorts of economics apply to digital products whose cost of replication is quite low, in comparison to physical goods. 

Or consider Facebook Messenger, or Skype or WhatsApp. It is the same general business problem: competitors who can afford to give away valuable apps and features, or price them very low, because their business models are built on some other revenue driver. 

Incumbents in the New Zealand home broadband market lost about  three percent account market share over the last year ending in March 2022, says IDC. 

Notable share gainers include Trustpower, Contact Energy, Electric Kiwi and Nova Energy,  energy retailers who now are bundling home broadband with their energy services. 

“The energy retailers have a distinct advantage over the telcos; energy retailers don't need to make a profit on their broadband services,” says Monica Collier, IDC New Zealand researcher. 

How to ”compete with free" is a major question in the Internet era, where many goods--especially of the non-tangible sort-- can be replicated and produced with low marginal cost.

FTTH ARPU Between $50 and $70 Supports the Payback Model?

You might well question the payback model for new fiber-to-home networks which assume recurring revenue between $50 and $70 per account, per month, with little voice revenue and close to zero video revenue; take rates in the 40-percent range; and network capital investment between $800 and $1000 per passing and connection costs of perhaps $300 per customer. 

But that is the growing reality. Among the reasons: higher government subsidies; indirect revenue contributions and a different investor base. 

All that has shifted fiber-to-home business models in ways that might once have been thought impossible. 

In the face of difficult average revenue per account metrics, co-investment and ancillary revenue contributions have become key. Additional subsidies for home broadband also will reduce FTTH deployment costs. All that matters as revenue expectations are far different from assumptions of two decades ago. 

“Our fiber ARPU was $61.65, up 5.3 percent year over year, with gross addition intake ARPU in the $65 to $70 range,” said John Stankey, AT&T CEO, of second quarter 2022 results. “We expect overall fiber ARPU to continue to improve as more customers roll off promotional pricing and on to simplified pricing constructs.”

Mobility postpaid phone ARPU at AT&T was $54.81. According to some studies, fiber-to-home recurring revenue is lower than that. But AT&T appears to be taking market share from key competitors where it has deployed new FTTH facilities. 

Different investors also are becoming important for access infrastructure. Retail connectivity providers are judged by their ability to generate cash flows, but hampered by the huge capital investments they must make to do so. Institutional investors, on the other hand, have longer payback horizons. They value the predictable cash flow just as much as do telcos, but can afford to be more patient on payback.

Ongoing reductions in operating costs and complexity also play some role in lower breakeven points for connectivity provider access investments. Also, government support mechanisms can reduce deployment costs by as much as 30 percent, in some cases.  

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. 

Econstor

So the business case remains challenging, and especially so in less-dense areas. The main point is that firms deploying fiber to home facilities must do so with radically-reduced expectations for ARPU. 

In recent investor presentations, Frontier Communications has made three points about its prospects for revenue growth based on optical fiber deployments: the number of consumer broadband accounts; the number of businesses within 250 feet of existing fiber assets and the number of cell towers within one mile of Frontier fiber assets. 

Recent presentations also have shown fiber-to-home home broadband average revenue per user of about $63. 

source: Frontier Communications 

Two decades ago, the business model might have assumed far higher revenue per account. A telco or cable TV customer with a voice line generating $30 a month, plus internet plus video could have been worth about $100 a month in revenue. 

Now Frontier says ARPU for an FTTH customer is about $63 a month. Assume that figure includes some amount of voice revenue and zero video revenue. The change in revenue expectation  (not adjusted for inflation) per potential customer is roughly 40 percent lower than might have been the case in 1995. 

Lower-density areas might only be upgraded with fixed wireless, though higher subsidy levels will increase deployment of FTTH in rural and lower-density areas.  

For at least some observers, the change in FTTH business model asumptions is stunning. 

New Zealand Home Broadband is a Reminder About Digital Era Competition

Incumbents in the New Zealand home broadband market lost about  three percent account market share over the last year ending in March 2022, says IDC. 

Notable share gainers include Trustpower, Contact Energy, Electric Kiwi and Nova Energy,  energy retailers who now are bundling home broadband with their energy services. 

“The energy retailers have a distinct advantage over the telcos; energy retailers don't need to make a profit on their broadband services,” says Monica Collier, IDC New Zealand researcher. 

Where have you seen this story before? Fairly broadly in the consumer internet app and consumer access services business. The scary implication: “it is hard to compete with firms that give away what you sell.”  

In other words, can you compete with "free?" That complaint lies at the heart of issues connectivity service providers have had with over the top edge providers or app providers.  

How to ”compete with free" is a major question in the Internet era, where many goods--especially of the non-tangible sort-- can be replicated and produced with low marginal cost.

For communications service providers, the issue has arisen mostly in conjunction with low cost or “free” services such as Skype or WhatsApp that supply voice or messaging services “at no incremental cost,” once a user has suitable devices and Internet access.

That has led many to say the economics of abundance makes new revenue models possible. Some would say “abundance,” a relative term, makes new models essential, in at least some cases. But the implications are startling.

The basic idea is that transistors, storage, computation and bandwidth are so abundant  the cost of their use--and digital products built on them-- is a price very close to zero. 

The corollary is that businesses based on the use of such resources can be viewed differently from businesses where physical  inputs are necessary and relatively expensive.

In other words, businesses based on abundant inputs can "waste" those resources. In a pre-broadband, pre-Internet-Protocol era, unicasting (content on demand) would have been nearly impossible. That is why video entertainment was broadcast or multicast. 

The same sorts of economics apply to digital products whose cost of replication is quite low, in comparison to physical goods. 

7 EC Countries Warn Against Hasty Action on Hyperscaler Payments to Fund Internet Access

As the European Union considers new laws that would make a few hyperscale app providers pay fees to providers of internet access infrastructure, seven EU countries warned the European Commission against any possible hasty decisions.

The letter was sent by the Netherlands, Denmark, Estonia, Finland, Ireland, Sweden, and Germany.

Telefónica, Deutsche Telekom, Vodafone and Orange are pushing the EC to mandate the new payments. 

The European Union declaration on digital rights act calls for a framework where "all market players benefiting from the digital transformation…make a fair and proportionate contribution to the costs of public goods, services and infrastructures".

In other words, big app providers who impose most of the traffic demand on access networks should help pay for the access infrastructure.

It is not surprising that infrastructure cost burden sharing is sought by internet access providers, who argue they must invest based on demand created by third parties. Says Orange, “the investment burden must be shared in a more proportionate way.”

“Today, video streaming, gaming and social media originated by a few digital content platforms accounts for over 70 percent of all traffic running over the networks,” Orange argues. “ Digital platforms are profiting from hyper scaling business models at little cost while network operators shoulder the required investments in connectivity.”

It is not a new argument. Infrastructure cost sharing has been talked about since at least 2006.  

The document also calls for “developing adequate frameworks so that all market actors benefiting from the digital transformation assume their social responsibilities and make a fair and proportionate contribution to the costs of public goods, services and infrastructures, for the benefit of all Europeans” 

In other words, the argument is that access providers need some form of revenue sharing with the app providers using the networks. 

We might take that as evidence that the connectivity service provider market is broken, or breaking. 

 If so, what is the reason and what are the solutions? Those questions are inevitable as the European Telecommunications Network Operators’ Association continues to argue before EU regulatory bodies that some form of revenue sharing (taxes, essentially) need to be levied on hyperscale app providers to make the service provider business model work. 

The basic argument is that hyperscalers impose most of the costs of building and operating an access network, but that internet service providers cannot “recover their costs” because of asymmetric bargaining power with the hyperscalers. 

Not to be flippant, but that is akin to electricity providers arguing that they do not have the power to levy fees on the manufacturers of air conditioning or heating systems, light bulbs or lamps to support the electricity delivery business model. 

Electrical utilities recover such fees--and support their business models--by charging customers for consumption of electricity. Historically, so did telcos, though the role of government subsidies and price regulation also was key. 

As always, the problem is complex and not simple to resolve. Large ISPs argue that their business models are unworkable without direct revenue contributions from third parties. That is the gist of the argument. 

So the issue is how to remedy the problem. And ISPs might not like the eventual answers.

One potential answer is to nationalize the former incumbent telcos, making them government-owned entities again. Another answer is to allow the markets to return to monopoly structures by allowing most of the competing firms to fail. 

Nor can big ISPs avoid questions about the soundness of their own cost structures; marketing practices and efficiency. Ignoring for the moment differences in market scale, U.S. ISPs between 2014 and 2020 reduced the amount of capital investment; European telcos saw capex burdens grow. 

To be sure, some of the change might be transitory. Japan’s costs climbed while South Korea’s capex first climbed, then dropped, presumably because of the spike caused by early 5G deployment. 

Still, one “easy” solution is for ISPs to charge their own customers based on volume consumed, as remains the case for electricity, fresh water, natural gas. In fact, nearly every commodity purchased by consumers is based on volume of consumption, whether that is groceries, gasoline or clothing. 

Eventually, that basic line of reasoning might eventually lead back to price controls and rate regulation, which ISPs almost always oppose. But inability to charge based on volume of consumption is among the root causes of business model instability.