"Hybrid" Access Networks Continue to Make Sense

Historically, times of technology transition result in “hybrid” approaches. Once upon a time, sailing ships were outfitted with steam boilers as well.

Decades ago, building on pair gain technologies originally developed to support what we know as “T1 or E1” service, engineers began experimenting with Asymmetrical Digital Subscriber Line, essentially a modification of the method used for T1 service.

Initial results were not so promising. Some thought it never would be possible to make ADSL workable in real-world operating environments, even if some techniques worked in the laboratory.

Of course, once upon a time, engineers at Bell Laboratories also believed it was impossible to deliver 20 channels of analog video using a single pair of lasers. But systems delivering at least 80 channels of analog video eventually were developed.

Once upon a time, engineers doubted a high definition TV signal could be delivered in just 6 MHz of bandwidth. At the time, 45 Mbps or so was thought to be necessary. Today, standard broadcast TV uses a 6-MHz signal.

The point is not simply that hybrid approaches are a common bridge between technology eras, but also that “what is possible” can change, dramatically.

So it is that BT reports G.fast trial results suggesting that “1 G.fast” technology could deliver 700 Mbps speed downstream and 200 Mbps upstream, if G.fast was deployed, to about 80 percent of locations now served by fiber to the curb networks (FTTC).

That would have been unthinkable two decades ago, and improbable a decade ago. But as with earlier transformations related to multichannel analog video using a single laser or HDTV bandwidth, additional effort has wrung unexpected output from older technology platforms.

The BT trial is part of development efforts seeking to reach gigabit speeds over hybrid networks using copper drops and optical fiber distribution.

In its recent G.fast tests, BT has been able to deliver download and upload speeds of 786 Mbps downstream and 231 Mbps upstream over an FTTC line using a 19-meter (about 62 feet) copper drop cable.

That is significant since many fixed networks in suburban or urban areas feature copper drop cables of perhaps 100 feet to 150 feet long. To achieve 700 Mbps, a service provider would have to use a “fiber to the telephone pole” or “fiber to a cabinet” network that places cabinets about as densely as a telephone pole network does.

BT also tested G.fast with a 66-meter (216 feet) copper line and found that the download speed fell to 696 Mbps while top uploads weighed in at 200 Mbps.

In other words, “close to gigabit speeds” might be possible over relatively standard drop cable networks.

The International Telecommunication Union is working on standards for G.Fast, so commercial deployment will have to wait a bit. Some think the standard could be finished by 2015.

But the development shows how much value a hybrid approach can yield during a time of technology transition. Decades ago, few believed such performance was possible, using such pair gain technologies.

But industries have very high incentives to do something dramatically better in the context of a legacy technology platform.

Broadcasters “needed” the ability to deliver HDTV in the same bandwidth as analog TV. Cable operators “needed” to preserve transparency of video format (no transcoding) as they added optical fiber backbones.

Telcos “needed” to preserve the value of expensive copper drop cable networks as they have progressively boosted speeds. But hybrid approaches abound elsewhere as well.

Hybrid computing environments, partly using cloud and also premises-based data centers, now are relatively common. Mobile service providers use both their own networks and Wi-Fi to support communications.

So work on gigabit access networks using hybrid approaches is not unusual.

Bell Labs, the research arm of Alcatel-Lucent has achieved 10 Gbps speeds over very-short distances as well.

Bell Labs XG-FAST, an extension of G.fast technology, has been shown to reach gigabit speeds at distances of about 70 meters (229 feet).

By way of comparison, G.fast has been shown to deliver 500 Mbps over a distance of 100 meters (328 feet).

Bell Labs also achieved 1 Gbps symmetrical service over 70 meters on a single copper pair. 10 Gbps was achieved over a distance of 30 meters by using two pairs of lines (by “bonding” two pairs of wires.

“Fiber to where you can make money” is an aphorism illustrating the economics of optical fiber access network deployment, and the aphorism remains apt.

Internet service providers have high incentives to maximize the use of existing copper access facilities in many scenarios, even if fiber to the home makes more sense in new installations.

Technology comparison
Technology	Frequency	Maximum aggregate speed	Maximum Distance
VDSL2*	17 MHz	150 Mbps	400 meters
G.fast phase 1*	106 MHz	700 Mbps	100 meters
G.fast phase 2*	212 MHz	1.25 Gbps	70 meters
Bell Labs XG-FAST**	350 MHz	2 Gbps (1 Gbps symmetrical)	70 meters
Bell Labs XG-FAST with bonding***	500 MHz	10 Gbps (two pairs)	30 meters

* Industry standard specifications. G.fast allows for upload and download speeds to be configured by the operator.

**   In a laboratory, reproducing real-world conditions of distance and copper quality.

*** Laboratory conditions

Is There a Grand AT&T Video Strategy?

Otter Media, a venture between The Chernin Group and AT&T, has purchased a majority stake in Fullscreen, a global online media company. That investment is a concrete step in the direction of creating the ability to deliver entertainment video over the top and on demand.

Otter Media was established by AT&T and The Chernin Group to invest in, acquire and launch over-the-top (OTT) video services.

Fullscreen, founded in January 2011, works with more than 50,000 content creators who engage 450 million subscribers and generate four billion monthly views.

But that move is only part of what AT&T is doing in entertainment video. AT&T obviously would like higher take rates for U-verse video. But AT&T also wants to buy DirecTV as well.

All that should raise questions about the possible grand strategy. Could DirecTV eventually become AT&T's "standard" linear video platform, while the fixed and mobile networks become the platforms for on-demand, streamed video?

Of course, perhaps there is no unified grand theory, at least, not yet. Perhaps U-verse video remains an essential part of the fixed network triple-play value proposition. Perhaps DirecTV really is an out-of-region platform.

The DirecTV acquisition creates a national video footprint outside AT&T’s fixed network footprint, and in any case throws off significant cash flow, valuable in its own right, some would argue.

And, since virtually all observers see a more-important role for OTT entertainment video over time, investing in alternative enabling platforms makes sense as a hedge, if for no other reason than to free up bandwidth on the fixed network.

Some might argue that, eventually, AT&T might be tempted to rely primarily on DirecTV for linear video, thus freeing up more bandwidth on fixed networks that do not already have U-verse video.

Some might even speculate that AT&T might, at some future point, and especially if the shift to OTT accelerates, decide that U-verse video does not make sense, if it can bundle DirecTV in region.

That wouldn’t necessarily be an easy transition. But majority technology and business model changes rarely, if ever, are easy.

Times of technology and business model transition are difficult for incumbents: they have to protect and harvest a declining product or products, using an older technology base, while simultaneously nurturing growth of a new set of products, built on the new technology base, that might actually cannibalize the existing business.

That largely explains the behavior of linear TV distributors including cable TV, telco and satellite TV providers. Even if all see an eventual disruption of the linear model, all will strive mightily to protect revenues from the current model as best they can, creating hybrid products that add value to the legacy product set and provide a hoped-for bridge to the future.

That is why “TV Everywhere” requires that customers first buy the traditional linear product before they are able to use the streaming features.

The evolution of the consumer services market to a bundled product business (triple play, quadruple play) likewise is why both Dish Network and DirecTV have made moves to transition from satellite-only to hybrid or integrated models where a bundled product can be sold.

Verizon and AT&T arguably will do so as well, defending and harvesting linear video as long as possible, while investing in over the top, on demand delivery and revenue models.

That explains the investment in Otter. It is a hedge on a different future.

To some extent, the acquisition of DirecTV is an effort to gain significantly-greater share in a business producing significant cash flow, in the belief that the ability to bundle with mobile and other fixed network services.

Perhaps DirecTV is not even seen as an essential part of the future network transition to OTT delivery. But it might be helpful in other ways, such as creating content buying power.

Still, at least some might suggest an eventual AT&T move to end or limit support for U-verse video. Much would hinge on when that happens, and how strong consumer demand remains.

So long as linear video demand remains largely intact, there arguably is little need to do anything disruptive.

The big questions would come if linear video begins to decline fast, consumers opt to watch video entertainment OTT and content suppliers decide to support OTT in a big way. Then no linear video supplier would be able to avoid asking how much should be invested in delivering a product with rapidly-declining demand.

Under those circumstances, no linear video supplier would be able to avoid evaluating the value of linear video and network resources devoted to delivering linear video.

Eventually, all ISPs Will Have to Shift Bandwidth from "Linear Video" to Internet Access

Why is high speed access the strategic foundation of future fixed network business models? That is where the enduring value lies. No matter how important mobile becomes, there are some applications and features a fixed network can provide better than any other alternative, including mobile networks.

Consider only end user demand for video entertainment. If one assumes that a typical television viewer watches four hours a day, and that, someday, that will shift largely to over the top delivery, huge new bandwidth demands result.

And the demand grows with image quality. With standard definition as the baseline, high-definition, 4K and eventually possibly-higher resolutions will put huge stress on access networks.

Before compression is applied, 4K video requires four times the bandwidth as HDTV. In some cases, the bandwidth required to support HDTV was about eight to 10 times that of a standard definition signal.

In other words, 4K video, delivered over the top, might require 20 Mbps to 45 Mbps per stream. So bandwidth is one issue. Usage caps are the other issue. Without compression, a standard two-hour movies represents a 100-GB file.

You see the problem. Even a fixed connection might well have a 300-GB usage cap. Many mobile usage plans have effective per-device usage caps of perhaps 5 GB to 10 GB.

Looking at mobile services, Wi-Fi offload has become an important mechanism for allowing devices to consume data at rates that far exceed the actual mobile network usage cap.

That makes mobile data offload a primary value of the fixed network. Voice and messaging require such minimal bandwidth they do not affect the bandwidth demand requirement.

For telcos, cable TV companies or Internet service providers, high speed access is the foundation of the business, going forward. Video already dominates overall demand for gigabytes, and will over time grow even more important, as image resolution increases and most apps acquire the ability to incorporate video into their experiences.

What are the practical implications? The value of bandwidth will shift in the direction of Internet capabilities, over time, and away from bandwidth devoted to linear video.

Cable operators and satellite TV providers already have managed to reclaim significant amounts of bandwidth by shifting from analog to all-digital video delivery.

Might AT&T have something similar in mind in its bid to acquire DirecTV. Out of region, AT&T gains the ability to sell a triple-play offer. The big question is what happens in region. It might be reasonable to expect U-verse video to remain the delivery mechanism, where AT&T already has it deployed.

Long term, it is questionable whether any supplier will want to “waste” bandwidth on linear video, if demand shifts dramatically to over the top delivery over the Internet.

Interestingly enough, that also should shed some light on current arguments about “not making the Internet cable TV.” The concern is legitimate, but misplaced.

There is nearly universal belief that, eventually, today’s linear video service will migrate to some form of OTT delivery.

So it is not that the Internet, overall, “becomes cable TV,” but that cable TV content and business models will shift to use of the Internet for content delivery.

Managed services, in fact, are likely to become more important over time, even when public Internet networks are the delivery mechanism. Carrier voice provides another example.

Carrier voice will use Internet Protocol, on both managed and unmanaged networks. But that illustrates the complexity of arguments about quality of service. Consumers are going to have different expectations of services they have paid for.

In any event, you get the point: high speed access has to be the foundation for fixed network service providers.

Mexico to Consider Wholesale-Only LTE Model

In markets where there is separation between physical networks and retail sales of communications services, the “dumb pipe” issue is germane.

Where there is structural separation of the network function and all retail and branding operations, what is access but an essentially commodity-like pipe function, equally available to all contestants?

In such scenarios, the value of the product is determined not by the features of the wholesale network, since every contestant gets the use of that resource, at the same wholesale price.

In that case, differentiation on wholesale-provided features is not possible, and pricing differentiation will be limited.

Uniqueness therefore has to be added using elements not sourced from the wholesale network infrastructure provider.

That is not to say the network-based services are actually “dumb,” only that network-derived features will be tough to differentiate. But that’s essentially the business problem illustrated by the phrase “dumb pipe.”

In a number of world markets, service providers are going to have to learn how to manage that issue, as a number of countries are taking a “wholesale-only” approach. Some, as in Australia, are doing so to support fixed network services.

Others are doing so to expedite availability of Long Term Evolution fourth generation networks. As a result, new thinking about sources of value is likely to happen, since retail service providers will not be able to differentiate on the extent of coverage or features of the mobile network.

There might be some ability to differentiate on price or packaging, but that will be limited. Other features and values not related to the physical network and its features will be necessary.

In a way, that makes wholesale-driven markets more susceptible to “dumb pipe” commoditization, even if functional structural separation also means retail contestants avoid the capital investment that otherwise would have been required.

In a way, that means less concern about raising capital, but much more thinking about how to create uniqueness and value. And that might happen in a growing number of markets.

In a number of cases, entire new networks, owned by the government, either are proposed or underway. Australia’s National Broadband Network provides an example in the fixed network segment of the business.

But a group of potential investors also now has submitted a bid to the government of Mexico  to finance the construction of a new wholesale-only mobile network.

That is similar to the situation in Rwanda, where 4G spectrum was donated--not auctioned--to a an entity charged with building a national LTE network. In Rwanda, KT Corp. was selected by the Rwandan government to build a national LTE network, known as olleh Rwanda Networks, (oRn).

The new infrastructure company oRn will operate exclusively in a wholesale capacity, providing services to retail service providers. And it appears that as many as nine other African nations are considering doing something similar.

Nigeria also appears to have taken the wholesale-only LTE approach.

Kenya also is interested in a wholesale-only LTE network approach. Existing mobile service providers, to nobody’s surprise, have not been entirely sure they want to operate under such a structure.

The larger mobile service providers, including Safaricom, would much prefer to own their own spectrum. So it still is not clear whether the wholesale approach will win.

Safaricom serves over 66 percent of mobile users in Kenya, so its participation in any wholesale LTE plan is likely crucial. And Safaricom might well continue to hold out for getting its own spectrum.

Safaricom’s reluctance again focuses attention on the strategic value of spectrum assets, at least where multiple licenses are granted.  

In markets where a single wholesale entity controls all LTE 4G spectrum, the access network itself arguably does not confer competitive advantage.

It’s another example of how “dumb pipe” remains a crucial issue for telecom service providers.

In Mexico, it is unclear whether the new proposal will succeed. The investing group still has not secured all the capital required. The government hasn’t yet agreed to donate spectrum.

But if Mexican regulators agree, the new wholesale company will have exclusive use of 90 MHz of spectrum freed up in the transition from analog to digital broadcasting.

"Without a shared network ... it will be impossible to have sufficient telecoms service coverage, keeping our country behind," Communications and Transport Secretary Gerardo Ruiz Esparza said earlier this year.

That Mexico’s mobile market is in need of competition is hard to contest. Mexicans pay the highest prices for the slowest median broadband speeds in the 34-nation Organisation for Economic Co-operation and Development and mobile penetration is among the lowest in Latin America.

Up to this point, America Movil has had 69 percent share of the mobile market. Number-two provider Movistar, owned by Telefonica, has had 19 percent market share.

Whether Mexico will go the wholesale-only route remains to be seen.

Is AT&T DirecTV Acqusition a Big Mistake, a Clear Win, or a Deal of Unknown Ultimate Impact?

Some critics believe AT&T should not attempt to buy DirecTV. Some might say the deal was a reaction to the Comcast proposed acquisition of Time Warner Cable and will not provide enough synergies to drive value. In that view, AT&T should spend its acquisition or network capital elsewhere.

Some question the amount of potential acquisition savings AT&T has claimed. But that might not even be significant. The issue is that AT&T might wind up in a situation where it has to pay out 70 percent to 80 percent of its cash flow to cover its dividends.

For that reason, some think AT&T simply shouldn’t do the deal. So far, there is no evidence AT&T will withdraw. In fact, AT&T already seems to have reached agreement with regulators about what AT&T has to do to gain antitrust clearance.

Those who oppose the deal are left with the hope regulators will block the deal, but that seems unlikely, in view of the news that antitrust concerns have been dealt with.

But what if “synergies” are not the issue, or even video scale? What if AT&T actually believes DirecTV offers a high cash flow opportunity, even if it might be a slowly declining business, and that the cash flow is reason enough to do the deal?

AT&T would not be the first company to find it must finance both high investments in its core business, as well as pay significant dividends.

In that view, whatever AT&T might do, access to high cash flow from DirecTV helps by supplying cash for dividend payments, while the company continues to invest in its gigabit networks and other new lines of business.

To be sure, some will make the argument that AT&T essentially is not telling the truth; that it will eventually do something other than what it now says it will do.

An independent DirecTV might actually already believe it has passed the highpoint of its subscriber adoption, if it remains an independent company.

But AT&T might argue it has a solution for that problem, namely the ability to bundle DirecTV with mobile service, fixed Internet access and voice. In that scenario, might DirecTV’s eventual decline is much more gradual?

It’s a reasonable theory, if still a theory. Keep in mind that virtually everybody believes linear video, as an industry, already has passed its peak. What forecaster, inside the companies or outside them, really believes the market can grow from here?

Rather, the strategic challenge is to prolong product demand as long as possible, as profitably as possible.

AT&T and DirecTV might believe bundling opportunities will play a big role in that regard.

Some argue there are synergies.  Certainly AT&T has suggested it will benefit to some extent by becoming a more-sizable buyer of content for its linear video services, on the strength of DirecTV’s mass.

But much will hinge on what conditions the Federal Communications Commission or Department of Justice might attach--and to which AT&T already has agreed--in exchange for approving the merger.

If past precedents provide guidance, that will mean a period of perhaps three years when existing packages and prices for current customers are protected from change.

In a drastic scenario AT&T obviously does not expect, AT&T might be required to divest video subscribers in any areas where its U-verse services are offered. That seems an unlikely FCC or DoJ objection, but it is possible.

Still, it seems unlikely AT&T would be willing to buy DirecTV for its stated price if AT&T believed the value of DirecTV would be reduced by as much as 5.7 million video accounts that would have to be divested.

About as thorny an issue as that is which network would support the divested customers. AT&T, it seems likely, would not want to support a new third-party owner of divested U-verse video accounts, running over AT&T plant. Nor would AT&T seemingly gain so much contract scale were it to have to divest its 5.7 million U-verse video accounts.

It therefore is hard to believe significant divestitures are contemplated.

Assuming few if any accounts actually must be divested, there is the matter of potential synergies. AT&T might, some think, simply continue to operate U-verse video on the fixed network and DirecTV as separate businesses.

There are no network synergies there. And some might argue there could be additional costs, particularly if AT&T has to do something major with the DirecTV or U-verse decoders to harmonize features and user experience.

DirecTV decoders might ultimately be outfitted with Long Term Evolution capability for return path signaling, for example. Depending on the number of box swaps, that could represent a rather large capital outlay, at $400 per customer, on average. Or pick some other number, if you like.

The point is that synergies might be few. And AT&T might still want to do the deal.

Any bundled offers would necessarily be a billing and marketing issue, with actual service provided by as many as three separate networks--satellite, fixed and mobile networks.

It might not be as elegant as a single fiber-to-home platform, but it can work. Service providers already do such things.

Still, there are other currently-imponderable longer term decisions. Perhaps half of AT&T high speed access customers bundle video with broadband access.

In the first quarter of 2014 AT&T had 11.3 million U-verse broadband customers and 5.7 million U-verse TV subscribers.

Compare that to Verizon Communications, which sells a FiOS video unit to about 80 percent of customers who buy FiOS broadband.

Verizon had 6.17 million FiOS broadband customers as of March 31, 2014, plus 5.32 million pay-TV subscribers.

If regulators approve the DirecTV purchase, AT&T says that it will still offer U-verse-branded TV to consumers in areas where its network has been upgraded to enable the service.

What happens in the future is probably the bigger issue. "Longer term, I think they will look to sell a bundle of satellite and U-verse data: it's more efficient and a better service," argues  UBS analyst John Hodulik.

Whether that is “better” is a judgment call. But that approach could have implications. Some might argue AT&T will simply slow down its bandwidth upgrades. If it does not have to support video services over its fixed network, virtually all the physical bandwidth could be devoted to Internet access.

Cable companies face the same issue: they have to apportion bandwidth to support both video and Internet access. One of the advantages of switching to all-digital video delivery is that it is more efficient, in terms of bandwidth consumption, and essentially allows cable operators to use more of the network to support high speed access.

At some point, more than three years out, one could conceive of a move by AT&T to stop delivering video over its U-verse network. That would be disruptive, and could lead customers to churn off U-verse in substantial numbers, so one would think that is an unlikely plan.

U-verse video, assuming an average $80 per unit, represents $960 a year of gross revenue. At At 5.7 million units, that is $5.47 billion a year in annual revenue.

Of course, one can imagine other scenarios. AT&T could try and induce customers who buy U-verse video to buy DirecTV instead, reducing its exposure to the loss of U-verse customers, were it ever to decide U-verse video was not warranted.

That migration strategy would reduce exposure, if AT&T did decide to abandon U-verse video at some point. A couple of scenarios could drive that decision.

Linear video subscriptions could take a suddenly sharper downward path industry wide, shrinking the total linear video market.

Or AT&T might someday conclude that the profit margin on high speed access is so much higher than linear video that the business case for devoting nearly all bandwidth to high speed access becomes more compelling.

It is less crazy than it sounds. Cable operators already can model a future business where demand for linear video is much lower, and demand for high speed access is much higher.

Verizon Communications executives say in public that the profit margin on FiOS video really isn’t that great.

There are probably more scenarios than we can even imagine right now.

Are Access Networks Still So Valuable?

A deregulation of fixed network voice prices in some European Union countries, a possible decision by Verizon to sell its tower networks and objections to AT&T’s purchase of DirecTV all have one common thread, namely an estimation of the value of access networks, to whom.

Where national regulators agree, fixed network service providers will be able to set prices for retail and wholesale voice services dictated only by an estimation of demand and value, and will not be price capped.

Of the customer segments, it arguably will be more significant that wholesale rates can be set at market rates, since in many European markets, competitors buying wholesale services from incumbents represent half or more of all accounts on the incumbent networks.

The potential shift to higher rates, particularly the wholesale rates, could essentially raise the value of the incumbent access networks, since wholesale revenue will rise.

In the U.S, market, a lifting of mandatory pricing rules essentially doomed most competitive voice providers relying on mandatory wholesale access at significant price discounts (of as much as 40 percent).

At least partially as a result, facilities-based cable TV operators quickly became the dominant class of competitors to telcos in the fixed network voice services business.

But aren’t higher wholesale or retail prices bad for consumers in the near term? It depends. It is conceivable that some marginally profitable suppliers will find their business models squeezed, and retreat from the market.

But facilities based cable TV operators will have so such problems. What could happen is that market share formerly held by wholesale-based providers is taken by facilities-based cable operators.

Regarding the potential sale of Verizon cell sites, possibly 12,000 to 15,000 discrete sites, one might initially argue such a move would suggest ownership of access facilities is not so important in the mobile business.

Actually, ownership of “facilities” remains of high strategic value in the U.S. mobile business. But the relevant facilities consists of rights to use spectrum exclusively, not the ownership of towers.

And access facilities nearly universally is deemed valuable, even in a business context where wholesale-based competition is possible.

No U.S. cable TV operator, for example, ever has proposed giving up its network and providing services over a leased network.

Most tier one fixed network telcos have resisted older common carrier rules that would grant widespread mandatory access to any new fiber access network they might build, as well. That is one way of suggesting such networks have important scarcity value.

Mobile service providers, one might say, have more nuanced views of the value of mobile tower assets, simply because the truly strategic asset is the exclusive right to use spectrum.

That is why in some markets, competitors share the cost of a single tower network, and might or might not share radio resources.

Sprint and AT&T have sold off their tower networks and lease access. Now Verizon might be willing to consider doing so as well. The point is that mobile executives do not see the same scarcity value in mobile networks as do fixed service providers.

A third angle is that some who object to AT&T doing any number of things often suggest that AT&T needs to keep sinking capital into copper networks to support voice.

That might seem odd, since many who criticize AT&T for not upgrading to optical fiber fast enough also say they want AT&T to spend more capital maintaining a copper network.

AT&T would prefer to make a faster transition to new that are either all fiber or fiber-reinforced in ways similar to cable hybrid fiber coax networks.

That likewise speaks to the perception of value. AT&T believes its vast fixed network consumer and business access networks have scarcity  value, but the copper networks arguably have less value than optical networks, in no small measure because wholesale obligations for optical access have fewer mandatory wholesale obligations.

Competitors, on the other hand, would prefer that AT&T be forced to maintain its copper facilities, since the competitors have wholesale access beneficial to their business models.

Paradoxically, in many quarters there is pressure on AT&T to keep investing in aging copper plant at the same time AT&T is asked to invest faster in the next generation optical and optical-reinforced networks. But one goal (keep investing in copper plant) drains capital from achieving the other goal (invest faster in optical-backed facilities).

So though it might occasionally seem as though access networks do not represent high business value because such facilities are scarce, the reverse is true.

Access networks still confer high business value because they remain truly scarce assets.