Economic Realities, Policy Myths Abound, Says George Ford of Phoenix Center at PTC'19

Telecom and internet regulators often create policies that have effects opposite of what they intended. They want more competition and then create policies that lead to less competition. They want more investment in next-generation networks and produce less. Good intentions produce harmful policies.

Those were some of the themes Dr. George Ford, Phoenix Center chief economist, discussed from the center stage at the recent PTC’19 conference. The point, he said, was that policies on competition, investment, network neutrality, broadband deployment and sponsored data access have had the opposite impact from what was intended, or hoped for.

One example, he noted, is the effect of U.S. net neutrality regulation on capital spending. “Most of the analysis was silly,” he argued. Comparing capital spending from one year to the next several, after the new rules, “is meaningless.”

“The question is what would capital spending have been absent the regulation, which requires the construction of what we call a counterfactual,” Ford says.

Ford is about the the only human being in the communications industry to take seriously the notion of the counterfactual, a concept similar to opportunity cost.

As applied to communications policy, the problem is that claims are made about policies producing an outcome, without the ability to show what might have happened if a different policy choice had been made.

In an investment context, opportunity cost represents the benefits an investor might have reaped by making a different choice.

One clear example is the debate over whether infrastructure investment grew or declined because of network neutrality rules. A counterfactual analysis is always necessary when looking at policy outcomes, in other words.

It is possible that infrastructure investment might have been higher in the absence of net neutrality rules, for example. In principle, such investment could also have been lower, in the absence of the rules.

The same principle applies for analysis of fair use rules, or virtually any other proposed public policy.

Another example is competition policy, which normally takes the form of policymakers desiring “more competitors” in the market. Ford quipped that the desired number of competitors is always “one more.”

“Policy makers often call for aggressive price competition, not realizing that doing so will, in turn, reduce the number of sellers, which they then lament,” Ford says. Ironically, “where a small number of firms exist, that outcome may be the result of aggressive competition, rather than an indicator of lack of aggressive competition,” Ford notes.

The other obvious problem is the capital intensity of communications access networks. That limits the number of viable firms. In most countries, “one” is believed to the viable number of fixed access networks, leaving wholesale as the only option to increase the number of retail providers. Some markets, such as the United States and Canada, have two and sometimes three fixed network competitors in the consumer markets, which is a bit of an anomaly, globally.

The point, Ford says, is that a small number of suppliers in fixed networks is the result of economic conditions, not a failure of policy. “If only two firms can profitably offer the service, then demanding more is wishful thinking and prone to produce bad policy,” he says.

“In my experience, ‘promoting competition’ is unlikely to have a material effect on actual competition.  In fact, it often has the opposite effect,” says Ford.

The 5G Killer App--Early On--is Capacity

What use cases will drive the volume in the early days of 5G? Prosaic, drop-dead-simple use cases related to internet access.

Most observers think at least some new use cases, revenue sources and business models will emerge in the 5G era, especially in the enterprise space, where most of the internet of things and ultra-low latency processes are likely will occur.

Little of that will happen for years, and volume deployment might take a decade or two (big new use cases often take that long to become ubiquitous).

So what happens at first? Early adopters buying 5G might do so because they value having internet access as much as an order of magnitude faster than the 4G they use today. Few will find they experience that big a change, and when they do, it will not be “everywhere,” but likely “some places” they routinely use their devices.

The challenge is going to be that a consumer mobile user who wants a generally-faster experience is more likely to get such an experience from the latest generation of 4G, not 5G (at first).

Keep in mind that 4G is going to get faster. If what a consumer really wants is faster speeds, then 4G is going to be a very-satisfactory solution, in many markets, offering perhaps three times to five times the speed of earlier 4G networks.

source: TeliaSonera

Latency performance is the other big early 5G difference, but it seems unlikely many consumers will have use cases that can take advantage of the ultra-low latency, with the exception of downloading and similar use cases. 4G latency also is improving, though.

The use of 5G as a fixed wireless platform is a form of mobile substitution where the end user value is internet access that rivals fixed network services. There are reasons for mobile service providers to use fixed wireless, though. It might lower the cost of upgrading networks to compete with cable TV operators.

That might also be true for ability to serve enterprise and smaller business as well.

The point is that the early-stage 5G enterprise apps sold in volume are probably going to be prosaic and focused: mobile substitution of fixed network data services; as well as services for workers who value faster downloads.

Other than faster speed or fixed internet access,  the early consumer use cases might be qualitatively different if mobile service providers can create and package (create tariffs and bundled offers while managing the usage caps) offers that feature mobile casting to TVs.

Of course, mobile service providers are creating their own streaming services (both linear and on-demand). Perhaps there also is some opportunity for “mobile casting” as a substitute for linear TV in a more direct sense (use the mobile as the internet connection, the service and the casting device).

But that would take some time, if it even is worth pursuing. In the near term, 5G is going to be about internet access speeds and costs, in both business-to-business and business-to-consumer market segments.

Mobile service providers also have internal reasons for deploying 5G. To keep increasing the supply of bandwidth, a shift from 4G has to be made, in any case, as 4G eventually will run out of gas.

Put another way, the killer app for 5G, early on, is capacity.

source: Nokia

Back to Monopoly?

Reliance Communications is exiting the mobile  business. There is a bigger question: after nearly 40 years of deregulation and privatization, intended to increase innovation and investment in communications, are we headed for a return, in many markets, to monopoly? 

Innovation Awards Program Gets Traction

Most people are not aware that the Pacific Telecommunications Council is a non-profit entity,  created more than 25 years ago to foster commercial adoption of communications and information technology across the Pacific basin.

Aside from serving its member companies, PTC also has programs that train young professionals to serve in the communications business;  provide leadership training for mid-career professionals on the way up and promotes internet access in rural areas across the broad Asia-Pacific region. 

A new program, Innovation Awards, not only recognizes leaders who are pushing the industry forward, but also now underpins a dedicated fund raising effort to support PTC's philanthropic missions. 

The Industry Awards ceremony, is a tax-deductible contribution (above the value of the meal) that directly funds our non-profit programs. But the awards program--open to all, and not restricted in any way to PTC members and the community--itself has gotten big traction in only its second year. 

Isabel Paradis, chair of the judging committee, talks about the program, which featured a panel of judges indicative of the industry's future, not its past. 

Netflix the Albanian Army?

Jeff Bewkes, then Time Warner CEO, in 2010 quipped, referring to Netflix, “Is the Albanian Army going to take over the world? I don’t think so.”

Today, more than 76 percent of 128 million U.S. broadband households take at least one major streaming service (Netflix, Amazon or Hulu) according The Diffusion Group. Another eight percent buy a linear streaming service such as YouTube TV or DirecTV Now.

A Deloitte study found the average streaming household subscribes to three services, and that doesn’t include ad-supported services.

Perhaps more significantly, Netflix has changed the video ecosystem’s business model. Now that Netflix has become the world’s first global television channel, other would-be leading competitors will have to glo global as well.

source: Netflix

Competition is coming, though. Netflix, Amazon and Hulu will continue to dominate the U.S. streaming services market, but will face scores of new services launched by broadcasters and content creators. Revenues are forecast to hit $21.22 billion in 2020, up from $16.38 billion in 2017, Ooyala believes.

Is 5G a Paradigm Shift?

Some observers use the term “paradigm shift” to describe 5G. Without getting overly picky, “paradigm shift” is a term of art, coined in 1962 by Professor Thomas Kuhn to explain the way science advances. In a nutshell, he argued that science progresses in a non-linear way.

The given consensus begins to encounter greater and greater anomalies, until finally the old consensus abruptly breaks, and a new interpretation arises. Precisely how that applies to industries and business models is never straightforward, especially since marketing grandiosity gets in the way.

But consider one way of looking at scientific paradigm shifts:

• The transition in cosmology from a Ptolemaic cosmology to a Copernican one.
• The transition in mechanics from Aristotelian mechanics to classical mechanics (motion).
• The acceptance of the theory of biogenesis, that all life comes from life, as opposed to the theory of spontaneous generation.
• The transition between the Maxwellian Electromagnetic worldview and the Einsteinian Relativistic worldview.
• The transition between the worldview of Newtonian physics and the Einsteinian Relativistic worldview.
• The development of quantum mechanics, which replaced classical mechanics at microscopic scales.
• The acceptance of Lavoisir's theory of chemical reactions and combustion in place of phlogiston theory known as the Chemical Revolution.
• The acceptance of Mendelian inheritance, as opposed to pangenesis in the early 20th century

The notion here is way beyond “big change.” Such paradigm shifts imply quantum changes (fundamental changes of state) that are “sudden, dramatic, and enduring.” Much of the emphasis here is on sudden.

It might help to look back at industry changes that could qualify as a paradigm shift, when old assumptions about the business model were broken, and were reconstituted in a new way, globally.

It is likely reasonable to require that any proposed paradigm shift affects the whole global industry, not a single industry segment or country.

A bit harder are platform changes within the industry: analog to digital switching; fixed to mobile; copper to optical access; monopoly to competitive regulation; state-owned to private ownership of firms.

Of those important changes, only the regulatory change from monopoly to competition--and government-owned to privatized firms--might universally be considered a paradigm change.

And that is a key facet for understanding when a development really is a “paradigm shift.”

Though quantum change and paradigm change often result from a long, slow period of quantitative changes, the shift of paradigm is quite sudden. As big a change as the change from “copper to optics” and “analog to digital” have been, some might not consider them quantum or paradigm changes.

The shift from fixed to mobile arguably was a paradigm change. The shift of revenue models (voice to internet access; fixed to mobile) might also qualify, but is more debatable.

In the addition to the end of monopoly, and the shift from fixed to mobile, the internet is probably the only other clear candidate most would agree was a paradigm shift.

Many firms now can use the internet to compete directly with telecom services or displace them entirely. At the same time, internet apps and services allow consumers to change their behavior, reducing aggregate demand for telecom versions of communications and entertainment products.

So Is 5G a paradigm shift? Some of us would have to conclude it probably is not. Is 5G a possible “revolution?” Yes. Even if not a paradigm shift, 5G could usher in an era where industry growth shifts from consumer to enterprise revenue sources. Will 5G pose a fundamental challenge to fixed network revenue models, on the older model of mobile substitution? Possibly, in some markets.

Failing that, 5G might still qualify as  “a big change.”

Claims that 5G is a paradigm shift are probably way overblown and hyperbolic.

Great White Shark

"We're going to need a bigger boat!"

Immediate 5G Value is Capacity, Irrespective of New Revenue Opportunities

In addition to brand-new revenue sources that should develop later in the 5G era, the immediate and practical value of 5G is to supply ever-growing capacity demands, even as 4G gets more efficient and other platforms come to commercial usage.

And 4G will continue to supply more bandwidth for the next five years, though at a declining incremental rate of increase after perhaps 2020, according to Michael Murphy, Nokia Networks CTO, North America.

source: Nokia Networks

source: Nokia Networks

The ability to aggregate Wi-Fi and unlicensed spectrum to mobile spectrum will add some bandwidth. So will 3.5 GHz spectrum, both licensed and unlicensed. But most of the new capacity will have to come from 5G, using a combination of techniques and new bandwidth.

Netflix Price Increase Illustrates Power of Powerful Brands

Consumers are price conscious, it is safe to say. So what requires explanation are instances where consumers--while seeking value--are willing to spend money for value. And perhaps nothing better illustrates the value of a valued brand.

Consider the coming increase in Netflix prices. One survey by The Diffusion Group suggests that a price increase of just $1 more per month, eight percent of Netflix subscribers are likely to cancel Netflix.

Netflix is raising the cost of its basic tier by a dollar, from $8 to $9 a month. The standard tier now will $2 more per month, up from $11 to $13, while the premium tier cost will rise from $14 to $16.

source: TDG

With the very-important caveat that consumers often say they will, or will not, do something, some of us would bet that Netflix now provides enough value that the overwhelming proportion of consumers will not desert. That did not happen the last time Netflix raised prices, for example.

Perhaps just as important, a recent price increase of similar magnitude by Amazon Prime--which some surveys suggested might have catastrophic results--did not slow growth, even if some customers might have departed.

Consider the impact when Amazon Prime raised it prices by 20 percent, from $99 annually to $119 annually, in 2018. According to one study, a whopping 45 percent of Amazon Prime customers indicated they would cancel their membership. Obviously that did not happen.

Undoubtedly there was some churn. But it appears the price increase did not have a devastating impact. According to one survey, perhaps six percent did cancel. But U.S. and global Amazon Prime memberships continued to climb.

source: Morgan Stanley

source: Consumer Intelligence Research Partners  

There are other likely impacts, as well. As Netflix raises the price umbrella, other valued streaming services will have more room to raise their own prices. That might include Amazon Prime itself, Hulu and possibly HBO Now.

On the other hand, higher prices for Netflix make harder the challenge for the scores of upstart and specialized services hoping to gain a foothold in the streaming market.

So Amazon Prime, Netflix and Apple provide key tests of the expected value of a brand, which is precisely that a valued brand allows a supplier to charge more. Valued brands can raise prices. Commodity suppliers generally have a hard time doing so.

source: eMarketer

Global Networks Now are Designed for Video

Nearly 80 percent of all global data traffic now consists of video, according to Cisco.

sources: The World Bank, Statista

By perhaps 2021, all traffic on global IP networks--save 18 percent--will consist of video, according to Cisco.

About 58 percent of downstream traffic on the global internet is video streaming content. Web traffic is about 17 percent of total, while gaming represents about eight percent of total downstream traffic.

Upstream traffic is dominated by video (especially user-generated video), web interactions and file sharing.

source: Sandvine

source: Sandvine

Also, net traffic growth is happening on private networks, rather than public networks.

source: TeleGeography

source: TeleGeography

Really "Off Road" Vehicle Concept

How Many "Mass Market" Service Opportunities Exist?

Skepticism about telco or cable involvement in the subscription video business is understandable: consumer demand is changing in ways that reduce the size of the market.

On the other hand, the consumer communications segment of the business is dominated by the four anchor services” mobile, fixed broadband, subscription video and fixed phone service, with little to no growth in each product line, at least in most developed markets.

It has long been a truism that consumer spending--in communications or entertainment--tracks growth of income (national gross domestic product, household income). The caveat is that demand for some products has declined markedly (fixed network voice), is declining (linear video subscriptions), or is growing slowly (fixed network internet and mobility).

source: Ofcom

Even in growing markets such as Asia, there simply are not that many products “most” consumers will buy, and most of what they do buy is related to mobile service.

source: Analysys Mason

The big point is that there are very few products “most” consumers will buy. And subscription video of all types (linear or on-demand; streaming or as a managed service; over the top or bundled) is among the few “mass market” services access providers can enter, once they have reached maturity in mobile voice and data; fixed network voice and data.

When Will Netflix Reach Positive Free Cash Flow?

Netflix and Amazon have been fearsome attackers of existing business models. Both firms also are equities that worry investors, often expressed as a concern over when free cash flow (and eventually actual profits) will be generated.

Eventually, as with any other company, positive free cash flow, then profits, must happen.

Morgan Stanley believes Amazon could reach free cash flow positive status could happen in 2021.

That, Morgan Stanley believes, can happen even as Netflix continues to invest heavily in content. In fact, Morgan Stanley believes Netflix is spending more than generally believed on content overall (including both original and licensed content). Other observers tend to agree with the higher figures for content rights.

Netflix spending was boosted dramatically in 2018.

source: Business Insider

NBCUniversal invests the most in original programming at the moment, to the tune of about $10.2 billion. Fox and Time Warner each spend a bit more than $8 billion. Disney has been spending nearly $8 billion, while Netflix has sharply boosted original content spending to perhaps $8 billion.

Amazon, on the other hand, has seen better free cash flow in recent years, by some estimates, even if razor thin.