Fixed Wireless, So Far, is the First Significant New Use Case for 5G

Promoters of every digital next-generation mobile network have promised and hoped for the creation of new use cases and applications. And that arguably has happened, though often not as fast as expected or in the way expected. 

Still, new use cases always have developed with each successive next generation mobile platform. Early in the 5G era, most observers now recognize that 5G fixed wireless has become the first obvious new use case for 5G. 

Most observers believe the internet of things, private networks, edge computing and virtual private networks are likely additional use cases. Opinion is more divided about the use of 5G to support more-immersive applications (gaming, digital twins) and understandably quite divided about whether the full metaverse of persistent, three-dimensional experiences will require 5G, and if so, to what extent and by what date. 

The only clear pattern is higher data consumption. 

Higher data consumption also seems a hallmark of each next generation platform. With the caveat that some of the increase is driven by greater numbers of subscribers, the trend of higher usage has been in place since at least 2005. Still, nobody would contest the argument that users consume more data on faster networks.  

source: Researchgate 

The usage increases have many drivers. As networks get faster, more video content is pushed out, and video is the media type with the highest bandwidth requirements. As networks get faster, people can do more in the same amount of time. So in any X block of time, more data will tend to be consumed. Also, as more content, transactions and activities are available online, more people spend more time interacting online. All of that drives higher data consumption. 

source: Ericsson 

Perhaps significantly, Ericsson’s ConsumerLabsurveys found that 5G users consume more content than do 4G users. They stream more high-definition video, more music, play more multiplayer games, download more HD content and engage in more cloud gaming, for example. Though some might find the use of augmented reality apps at an early stage, Ericsson finds that 5G early adopters use more AR content and apps. 

source: Ericsson 

So 5G is “crossing the chasm,” Ericsson says. The chasm is the big jump in value proposition required for a technology product to appeal to mainstream customers. 

Ericsson’s ConsumerLab research suggests that the adoption process is most advanced in South Korea, among 37 global markets where Ericsson conducted surveys. 

source: Ericsson ConsumerLab 

Ericsson uses segment definitions that intend to capture technology attitudes and willingness to adopt new technology. 

Tech enthusiasts are high-income, well-educated, between 25 and 39 years old, power users of mobile broadband who are driven by new technology, premium devices and rich experiences. They want to be the first people to try 5G and also let the world know about it. However, they are less sensitive to any initial limitations of 5G.

The tech-intrigued are primarily younger students, heavy mobile broadband users, especially heavy on online gaming. Very interested in 5G services which offer diverse types of entertainment content.

Tech pragmatists are middle-age parents, moderate or mainstream users of mobile broadband. They often will need proof of any benefits to 5G before investing. They are interested in 5G services that support them in organizing their work and daily life.

Late tech adopters: Low-income, light users of mobile broadband who are mobile first. They have a rather basic use of online services but are interested in 5G services that enrich connecting with others.

The tech-averse are unemployed, retired, older age group and lower-income users who do not see value in 5G.

Those categories roughly map to similar adoption segments popularized by Professor Geoffrey Moore. 

For most consumer technology products, the chasm gets crossed at about 10 percent household adoption. Moore does not use a household definition, but focuses on individuals. The chasm is crossed at perhaps 15 percent of persons, according to technology theorist Geoffrey Moore. 

source: Medium

Both ways of counting--households for some products, persons for others--are roughly analogous, given household sizes of about 2 to 2.5. The “household versus person” correlations would not work so well in countries where household sizes are larger. 

Perhaps shockingly for an innovation that promises much-faster access speeds, most respondents who plan to adopt 5G indicated that coverage was more important than speed. That would be typical for mainstream users who are less tolerant of product shortcomings. 

Mainstream customers are less interested in “bleeding edge performance” and “just want it to work.” Also note that the next wave of 5G adopters is far less interested in innovative apps, unlike the “tech enthusiasts.” 

source: Ericsson

How Much Disaggregation of the Connectivity and Data Center Businesses is Possible?

How much could connectivity service provider models disaggregate? Quite a lot, some believe. 

Consider the analogies of the digital infrastructure value chain to the hospitality value 

Chain (hotels and lodging). That ecosystem and value chain aer built on passive assets such as buildings and land. That is a real estate play with investment time horizons possibly in the decades. 

Then there are hotel properties built to supply lodging, which can use a variety of business models, ranging from real estate rentals to physical facilities management and operations. Investment time frames in this segment also can stretch out for a couple of decades. 

Then there are “brands” that are service providers, essentially focused on marketing and sales functions with scale economies. 

source: European Commission 

To use the connectivity provider analogy, there are digital infrastructure passive assets such as tower locations or some aspects of the data center business. Active assets include data center services, ranging from rack space to virtual service functions, or active wholesale connectivity networks. 

Then there are the clear retail “service” providers supplying internet access, mobile service or  “computing as a service” or “infrastructure” or “apps” as a service under a specific brand name. 

As in the hotel business, branded services often operate with shorter investment payback time frames (five to six years) while full real estate plays often are better suited to patient long-term investors who value predictable income streams more than asset appreciation. 

Private equity tends to operate with shorter five to six year horizons, with a focus on restructuring business models and operations to generate asset value and then selling those assets. 

The thinking there is that the ultimate buyers are patient investors able to handle a 20-year investment return cycle. Private equity acts as a shorter-term value reconstruction play, with the exit being a sale of the assets. 

The issue is the long-term impact on  the connectivity and data center businesses. Will branded service providers more often operate in the marketing and sales functions, and less in the ownership of physical networks part of the business? 

Will many or most service providers eventually resemble mobile virtual network operators who do not own physical network assets? That would be a big change in both fixed and mobile segments of the connectivity business. 

Shocking FTTH Revenue Assumptions

The economics of connectivity provider fiber to the home have always been daunting, but they are, in some ways, more daunting in 2022 than they were a decade ago. The biggest new hurdle is that expected revenue per account metrics have been cut in half or two thirds. That would be daunting for any supplier in any industry. 

These days, the expected revenue contribution from a home broadband account hovers around $50 per month to $70 per month. Some providers might add linear video, voice or text messaging components to a lesser degree. 

But that is a huge change from revenue expectations in the 1990 to 2015 period, when $150 per customer was the possible revenue target.  

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

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 

For at least some observers, the change in FTTH business model assumptions is stunning. Who would have thought FTTH projects would be undertaken when expected revenue per account was $50 to $70 a month?

Telco to "Techco?"

For a couple of decades now, executives in the connectivity business have expressed concerns about competing with the likes of Google or other hyperscale app and content providers. What that meant is complicated. On one level, it meant the need to “move faster” or “innovate faster.” 

But in addition to an up-tempo business culture, “competing with Google” sometimes was more tangible: Google was beginning to compete directly with connectivity providers in the area of products: voice services, mobile services, home broadband. 

These days that same concern often is said to be an instance of “telcos becoming techcos.” And that is complicated as well. 

Many telcos--or those who advise and sell to them--say telcos need to become techcos. So what does that mean? At least in part, the earlier concern about “move fast” culture remains. But some also would add that a techco uses modern computing architectures and practices. “Cloud native” provides one example. 

But there are other possible meanings, as well. 

At least as outlined by Mark Newman, Technotree chief analyst and Dean Ramsay, principal analyst, there are two key implications: a culture shift and a business model.

The former is more subjective: telco organizations need to operate “digitally.” The latter is harder: can telcos really change their business models; the ways they earn revenue; their customers and value propositions?

source: TM Forum

It might be easier to describe the desired cultural or technology changes, even without a change in business model. Digital touchpoints; higher research and development spending; use of native cloud computing; a developer mindset and data-driven product development.

Most of us might agree that doing such things is good, but does not necessarily mean telcos become something else. 

The key to possible business model changes comes specifically with the notion that telcos can become “platforms.” And even that overused term is subject to huge differences of meaning. Some use the classic “computing” definition that a platform is “hardware or software that other software can run on.”

Think “operating system” or even containers, program application interfaces, languages or X as a service as examples. In that sense, telcos might hope to become “techcos” by advancing their capabilities as application enablers. 

There is a tougher definition, though. A platform business model essentially involves becoming an exchange or marketplace, more than remaining a direct supplier of some essential input in the value chain. It is, in short, to function as a matchmaker. That is a different business model entirely.

For most of history, most businesses have used a pipe model, creating and then selling products to buyers. 

The platform facilitates selling and buying. A pipe business focuses more on efficiency in its value chain, where a platform focuses more on orchestrating interactions between members. 

The platform allows participants in the exchange to find each other. 

Platforms are built on resource orchestration; pipes are built on resource control. Value quite often comes from the contributions made by community members rather than ownership or control of scarce inputs vertically integrated by a supplier. 

In other words, using a “computer function” definition of “platform” implies one set of changes; using the “business model” definition is something else entirely. 

The point is that as useful as the phrase “we are not a telco; we are a techco” might be, it is marketing jargon. “Being digital” or “moving fast” or “being cloud native” or “boosting research and development” arguably are cultural changes many businesses can benefit from. 

It is not so clear that such changes (equivalent perhaps to the change from analog to digital) necessarily change a business model, though they might often improve the existing model. 

As helpful as it should be to adapt to native cloud, developer-friendly applications and networks, use data effectively or boost research or development, none of those attributes or activities necessarily changes the business model. 

If “becoming a techco” means lower operating costs; lower capital investment; faster product development or happier customers, that is a good thing, to be sure. Such changes can help ensure that a business or industry is sustainable. 

The change to “techco” does not necessarily boost the equity valuation of a “telco,” however. To accomplish that, a “telco” would have to structurally boost its revenue growth rates to gain a higher valuation; become a supplier of products with a higher price-to-earnings profile, higher profit margins or business moats. 

What would be more relevant, then, is the ability of the “change from telco to techco” to serve new types of customers; create new and different revenue models; develop higher-value roles and products or add new roles  “telcos” can perform in the value chain or ecosystem. 

That is the profound meaning some of us would say “techco” represents, if it can be achieved. To what extent can “telcos” earn lots of money--perhaps most of their money--from acting as a marketplace, rather than as creators and sellers of products built around connectivity?

To be sure, if “becoming a techco” has other intermediate value, such as boosting revenues and profits while reducing costs and speeding new product creation, the process would still have value. 

It would perhaps be the business model equivalent of the transition from analog to digital processes overall. That is important, but does not transform a telco into something else, which is what all the verbiage about “techco” implies. 

It is too early to assess whether “techco” is simply a change in marketing hype or something more profound. 

Inelastic Pricing; Exponential Usage is Core ISP Business Model Problem

These two charts explain, in a nutshell, the business model problem faced by mobile service providers. In the U.S. market, for example, data consumption--and therefore capacity--grows exponentially. That means ever-growing investment in facilities. 

source: CTIA

Service revenue, on the other hand, does not grow much, if at all. On an inflation-adjusted basis, U.S. mobile subscription prices have generally been flat for the past decade or more. 

source: in2013dollars.com  

Access provider revenue sources are multiple: business and consumer; flat-ate and usage-based products; base and value-added components. But revenue growth is driven by data usage. And relatively little of that usage is directly usage based. 

To be sure, “buckets of data” are somewhat related to usage, at least in the mobile segment of the business. But in the fixed networks business, charging tends to be usage insensitive, with pricing variability based on downstream speed, not consumption. 

And that, in a nutshell, illustrates the core problem for access providers: flat revenue and ever-growing capacity requirements.

History Suggests Web3 User-Generated Content Monetization Upside is Limited

For decades, in various forms, advocates have touted the enabling of a creator economy that allows individuals to monetize their work. Much of that attention has been bandied about since the time we began talking about user-generated content and social media, which is to say decades. 

source: The Business Model Analyst

 

A newer variation on that theme is the sharing economy, where latent assets are monetized by turning consumers into producers. That might include ride sharing services, lodging services, or even e-commerce sites such as eBay.

Some might say there also are analogies to e-commerce retailers such as Amazon, which connects buyers and sellers.

The latest argument is Web3, which supposedly will enable content creators or asset owners to monetize their own assets and work securely and easily. 

All that sounds fine, but scale matters in any business. The themes of radical decentralization and participation have been part of the internet ethos since the beginning. But commercial activities supported by, or enabled by the internet, require scale. 

Sometimes platforms win even as individuals win. But few individuals will ever attain mass influence or business scale. On social networks, for example, everyone has the right to speak. But what matters more is who gets an audience. Really-big influencers are few and far between. 

One might therefore argue that even if some Web3 tools and platforms succeed, none of those tools will change the economics of attention very much. Having the ability to publish might be ubiquitous. Garnering an audience is really the issue. And that is much harder.

Will Interconnection Fee Regime Change to Include All Traffic Sources?

“All segments of the internet ecosystem should have the opportunity to make fair returns in a competitive marketplace,” says the GSMA. Translation: a few hyperscale app providers who represent a majority of the traffic on ISP networks should pay interconnection fees as do telcos. 

The basic interconnection payment principle is that terminating traffic uses network resources, and receiving networks are therefore entitled to compensation. The idea is fundamentally that traffic sources (sending networks) owe money to traffic sinks (receiving networks). 

source: Researchgate 

What does this remind you of? Former SBC chairman Ed Whitacre said in 2005, referring to VoIP providers: “Now what they would like to do is use my pipes free, but I ain't going to let them do that because we have spent this capital and we have to have a return on it.”By the end of the year SBC had completed its acquisition of AT&T. 

“So there's going to have to be some mechanism for these people who use these pipes to pay for the portion they're using,” he said. 

Separately, Whitacre also said “Nobody gets a free ride, that’s all.” Also, he said “I think the content providers should be paying  for the use of the network.” 

Nearly two decades later, it appears app provider payments to telcos for use of access networks might expand from South Korea to Europe and then possibly elsewhere. 

One needs patience in the global connectivity business. Some developments take decades to reach fruition, whether that is artificial intelligence, the metaverse, cloud computing, the end of network neutrality or replacement of copper access with fiber facilities.

Are Disaggregated or Vertically Integrated Models Ahead for "Telecom?"

One unknown about private equity investments in digital infrastructure is who winds up owning those assets. The PE business model entails selling assets after they have been restructured in some way that boosts the financial value of the assets. 

In principle, buyers could be operators of digital infrastructure businesses, such as mobile operators, bigger data centers, other connectivity providers or even other investment entities. Institutional investors, for example, might be attracted to the stability of long-term cash flows from assets that are complementary to other asset classes. 

source: CFA Institute 

Private equity, almost by definition, involves “fix and flip,” as returns are earned only when assets are sold. In that sense, PE operates as does venture capital, where returns are earned only when assets are sold. 

But none of that suggests any particular preordained form of exit. Whether public or private sales happen, assets often are sold to operating rather than financial buyers. Smaller data centers are acquired by larger data centers; smaller fiber networks are bought by larger networks; smaller tower networks are purchased by larger tower operators and retail internet service providers are purchased by larger ISPs. 

But assets might also be purchased on a longer-term basis by financial entities such as pension funds, more interested in predictable cash flows than operations, per se. The pattern of purchases can inform us whether something fundamental in the business model is changing. 

Among the bigger potential changes is a shift from monolithic, vertically-integrated service provider models to more loosely-coupled models used in the computing industry. Wholesale access network regimes and mobile virtual network operator models provide early examples, as do wholesale tower companies. 

Vodafone Portugal, for example, is buying Llorca JVCO Limited, parent company of MasMovil.

MasMovil was taken over by private equity funds Providence, Cinven and KKR two years ago, so those assets might return to service provider ownership. 

In a typical PE deal, an investment manager (the general partner, or GP) pools money from investors (limited partners, or LPs) to purchase an operating company. After a certain number of years, the PE fund exits its stake from the company by selling it in either the public or the private market. 

“Who” the buyers are matters in terms of industry structure. It matters whether business models are wholesale or retail, and whether ownership patterns are relatively short term or long term. Wholesale PE assets might be sold to new owners who operate using wholesale models (business to business), selling only to other businesses in the ecosystem (such as radio sites for mobile operators). 

Similarly, PE assets might be sold to wholesale-focused providers of internet access and other communication services. That is a different long-term model than if assets are sold to a retail-focused service provider using an integrated model (owning both infra and supplying services). 

All that matters since the decisions move the industry more in the direction of a disaggregated model (where roles are separated) or maintain the traditional integrated model (where roles are combined). 

In a broad sense, digital infra ownership models might then range from a “computing” model (almost everything separated into layers or functions) to a traditional “telco” model (all essential elements are vertically integrated). 

Where all the PE assets ultimately wind up will tell us quite a lot about the future direction of digital infra. 

The Willie Sutton Rule and Taxes on App Providers to Support Access Networks

Some might be tempted to argue that efforts to add application providers to funding of access networks is bandied about as an example of the Willie Sutton rule: that's where the money is. 

Willie Sutton famously was asked why he robbed banks. Though untrue, he is said to have responded “because that is where the money is.” 

That has led to the Willie Sutton rule, which is that, when trying to solve a problem or gain an outcome, it is best to choose the most-obvious route. 

source: Market Business News 

For a variety of reasons, ranging from competition to the economics of bandwidth growth and charging for consumption, the internet access business model is strained. In some regions, government regulations also play a part, as in Europe, where regulators have forced price reductions on service providers in various ways. 

For regulators and internet service providers, finding new ways to fund infrastructure is simply an application of the Willie Sutton Rule: take the easiest route to solving the problem.

Raising prices on business and consumer users seems to them not to be the easiest route. Tying consumption to prices also seems not to be the easiest route. Convincing the government to levy taxes on some app providers is an application of the Willie Sutton Rule.