What Will Drive 5G Apps? History Suggests We Don't Really Know

Nobody can say for sure what future fifth generation network (5G) mobile standards will look like. More significantly, nobody yet can predict how “value” will occur. Some emphasize new applications, as always is claimed for the next generation of networks. Others say it is universal access, across multiple networks, that will be a defining feature.

“Speed” often is positioned almost as an afterthought. But it would be reasonable to assume that speed will be among the most-obvious advantages for consumers, and that 5G-specific applications will develop later.

Ofcom, the U.K. communications regulator, believes 5G mobile will offer extremely fast data speeds of perhaps 10 Gbps to 50 Gbps, compared with today’s average 4G download speed of 15 Mbps (not considering LTE-Advanced or other developments in channel bonding that will boost speeds into the hundreds of megabits per second).

In South Korea, 300 Mbps already is commercially feasible over LTE networks.

For some, the new use of very high frequency spectrum above 6 GHz--not traditionally used for end user communications--could support financial trading, entertainment, gaming or holographic projections, Ofcom suggests.

Much more prevalent apps, at least initially, will be simple Internet access in high-density, high-traffic areas. Traditional “capacity,” in other words, is likely to be the immediate value.

The University of Surrey’s 5G Innovation Centre says the visioin for 5G is user experience that gives the user “the impression of infinite capacity.”

The International Telecommunication Union suggests peak 5G data rates will be in the range from 10 Gbps to  50 Gbps and latency of one millisecond.

At the moment, it is difficult to predict what the salient value of 5G--beyond capacity, speed and latency--will be. But that has been true for every succeeding generation of digital mobile networks.

Supporters often tout “new apps.” For service providers and consumers, the value almost always is found elsewhere--speed--initially. Eventually, new apps do emerge. You might argue text messaging was the singular legacy for 2G. You might suggest mobile email and Internet access was the legacy of 3G. Video entertainment might be developing as the singular new app that defines 4G.

Many believe apps related to the Internet of Things might characterize 5G. That sounds logical enough. But forecasters were wrong about new apps for 3G, which stubbornly refused to emerge. Most gave up on predicting new apps for 4G, arguing “there is no killer app.”

It is safe to argue 5G will support IoT apps. History might not confirm those predictions, at least in terms of magnitude. We rarely get it right, where it comes to next generation networks.

Content Rights Remain the Key Obstacle for Streaming

Big new business platforms typically require that a new ecosystem be built. That is the case for streaming TV as a successor to linear TV.

Content suppliers must agree to license distribution of the content in that form. Internet access must be widespread and of reasonable quality. Scores of millions of devices or adaptors typically have to be put into place.

PC and mobile device screens are widely populated; TV-capable screens less so. That means robust markets both for media adapters such as Chromecast, Fire TV and Roku, as well as higher sales of smart TVs.

On that score, about 26 percent of U.S. households own a streaming media device and 34 percent own a smart TV, according to Parks Associates.

That might help hexplain why linear video viewing is dipping and streaming is growing. About 40 percent of U.S. households subscribe to a paid digital video subscription service, with Netflix being the leader (32 percent), followed by Amazon Prime Instant Video (19 percent) and Hulu Plus (9 percent), according to the The Diffusion Group.

Across all of these services, Millennials have significantly higher subscription penetration, with nearly half buying Netflix.

Among Netflix subscribers, the preferred method of watching (44 percent) is through Internet-connected TV devices such as Apple TV and Google Chromecast.

Computers (27 percent) and gaming consoles or Blu-Ray players (21 percent) also are extensively used by the Netflix subscriber base.

The average household also spends over $6 per month on subscription Internet video services such as Netflix or Amazon Prime.

The streaming ecosystem is well on its way to completion. The last remaining big hurdle is the licensing of rights to distributors on a nearly ubiquitous basis. The other big questions are the terms and conditions of such licensing.

Business models contestants can try will be shaped by contracts that limit ways the content can be sold to customers. Up to this point, standard linear video contracts stipulate that channels must be placed on the retail tiers that are most often purchased.

Streaming sometimes is allowed when the user already has purchased a given channel as part of a linear package.

Streaming licenses can vary. In some cases, whole TV series and movies can be licensed, and viewed, a la carte. In other cases the access is possible as part of a streaming package created by a distributor such as Netflix or Amazon Prime.

Netflix introduced the concept of binge viewing, where all episodes of a given series could be watched, immediately.

Among the bigger questions for a future streaming business is whether bundling will reemerge in new forms. Some would argue it is cumbersome for consumers to navigate a content landscape where every network is a separate destination. Channels and networks aggregate content for a reason: it is user friendly.

Likewise, distributors aggregate multiple channels and sources for the same reason. In a future streaming business, one issue is the dominant or preferred packaging model. And many would bet that some form of bundling will reemerge. 

The linear video business will be transformed. But the role of distributors is likely to remain. 

UK Regulator: BT Cannot Set Wholesale or Retail High Speed Access Rates "Too Low"

Facilities-based competition might be the best alternative, where it is possible, but competition based on wholesale access often is the only available choice to regulators. But there are some obvious limits to the degree of innovation possible when the range of features is fixed, by definition. Since all contestants use the same platform, the services and features also will be the same.

The other problem is the range of pricing options. In such wholesale-based markets, the typical marketing tack is “same service, lower price.” By definition, price is the main form of potential differentiation (though suppliers are free to try and create value in other ways).

Oddly enough, wholesale prices can be set too low! In other words, the magnitude of difference between wholesale cost and BT retail pricing, U.K. regulators maintain, must be large enough to allow a competitor to buy wholesale service and then at least match BT’s retail price, while still allowing the wholesale customer a reasonable profit margin.

The new pricing rule means that BT must maintain a sufficient margin between its wholesale and retail high speed access prices that other providers can match BT prices and make a profit.

Essentially, the rule means BT will not be able to set retail prices for high speed access,or wholesale prices, that prevent competitors from making a profit when matching BT’s own retail prices for the same services.

How much that will help is always a debatable matter. In the U.S. market, a brief period of experimentation with wholesale-based competition showed that many competitors were possible when the spread between wholesale and retail price offered by the competitors was in the 40-percent range.

That competition collapsed when a rule change reduced the spread between wholesale cost and competitor retail cost to about 20 percent.

That will require complex monitoring of estimated BT costs, as a way of maintaining wholesale discount rates. The other complicating factor is that Virgin already has more share than BT in the 25-Mbps and faster portion of the market.

In December 2013 Virgin had 57 percent market share of all connections operating at 25 Mbps or faster. Overall, BT had the largest Internet access market share at 32 percent, followed by Sky with 23 percent and Virgin having 20 percent share.

OneWeb Plans 648-Satellite Fleet to Provide Internet Access to Underserved

WorldVu Satellites Ltd. has raised funding from Virgin Group and Qualcomm for a proposed global satellite internet company focusing on potential users in developing countries that cannot be reached by fixed or mobile networks, as well as to supply Internet access to flying aircraft.

The proposed network will cost between $1.5 billion and $2 billion, backers believe.

WorldVu Satellites founder Greg Wyler said. Wyler, formerly of satellite firm O3b, has been touting this idea for some time.

Virgin Group and Qualcomm are investors in the WorldVu “OneWeb Ltd.” service, which hopes to launch a constellation of 648 satellites. Investor Richard Branson thinks the total could eventually be higher than that. Branson also says voice service will be part of the core service.

Virgin is a sprawling conglomerate that now wants to build a new global satellite fleet to deliver Internet services to users who today do not have access by any other means.

Some might note that others have tried in the past, without much success, to create such networks, and few have tried to reach billions of people who today cannot afford to connect to the Internet.

But Virgin believes it has other assets that will help achieve OneWeb attain the goal of service at far lower costs.

Virgin Galactic’s “LauncherOne” program will be used to make frequent satellite launches at lower cost. Other launch partners. might be added, the press release announcing the venture hints.

Branson suggested that Virgin Galactic will be launching most of the OneWeb spacecraft, but not all of them.

“We have the biggest order ever for putting satellites into space,” Branson said. “By the time our second constellation is developed, the company will have launched more satellites than there currently are in the sky.”

The first launches are supposed to happen in early 2017. OneWeb controls a block of radio spectrum that it will use for the Internet service, but has to begin deploying the network to retain use of the frequencies, a typical requirement for spectrum grantees.

OneWeb’s satellites will weigh about 285 pounds and operate in a low-earth orbit about 750 miles above the planet’s surface. That has significant positive implications for potential bandwidth and latency performance, allowing much-lower latency than possible for geosynchronous satellites.

The deployment challenges will be significant for such a large fleet, but backers hope lower satellite and launch costs will help the venture provide consumer Internet access at far-lower prices than possible in the past.

What is the Killer App for Connected Car?

What is the killer app for connected car services? That’s another way of asking where the obvious value lies, for end users, car owners or fleet managers. So far, the answer is not clear.

Nor does it help much to assert that there is “no killer app.” That is a fuzzy answer essentially tantamount to saying “we don’t know,” or that we haven’t thought it through.

ABI Research forecasts the penetration of “embedded telematics” in new vehicles will increase from 13.4 percent in 2014 to 52 percent in 2020.

Nonetheless, a GSMA-commissioned report suggests that by 2018 such connected car markets will triple from 2012 levels, and generate €24.5 billion from in-vehicle services such as traffic information, call center support and web-based entertainment.

Some €6.9 billion will be generated by the sale of hardware such as telematics control units. An additional €4.5 billion will be earned by suppliers of telematics services such as customer relationship management.

The access connections portion of the business might represent €4.1 billion. But it always is possible such forecasts will prove too optimistic.

“While penetration levels of embedded connectivity in vehicles continue to grow steadily, it remains challenging for car OEMs to convince users to pay for built-in connected car services,” says Dominique Bonte, ABI Research director VP.

That is just another way of saying we haven’t discovered a connected car killer app, yet, and that consumers deem the value-price relationship yet to be strong enough to encourage high take rates.

So “full penetration is unlikely to be achieved solely through consumer-led drivers,” says Bonte. That likewise is another way of saying supplier push is going to be the key factor for wider adoption.

The “perceived value of safety services or in-car Wi-Fi hotspots simply are not big enough,” says Bonte. So something else will have to happen to spur adoption.

ABI Research suggests car sharing could be one such driver, enabling the remote finding and unlocking of “shared” vehicles.

Also, as the percentage of electric-only vehicles grows, remote monitoring of vehicle battery status could emerge as another value driver.

Or, ABI Research suggests, autonomous vehicles could provide the value.

In the meantime, growth will be fueled by other “non-consumer” apps such as eCall and stolen vehicle mandates in Europe, Russia, and Brazil, or manufacturer diagnostics, prognostics and preventive maintenance.

When Does Revenue Per Megabyte Matter?

As a rule, mobile and fixed network Internet service providers must care about revenue per megabyte and cost to supply megabytes, since revenue growth now often is driven by Internet services, and Internet services dominate overall network bandwidth issues.

But mobile now is a multi-product business, and each type of key app has distinct revenue per megabyte profile.

The price of various telecom services varies by as much as four orders of magnitude, per megabyte, with text messaging having the highest profit margin, voice having a high to moderate profit margin, video entertainment having moderate margins, and Internet access having widely-varying margin.

Of course, that is product profit margin, not “profit per megabyte.”

Does that matter? Not in some cases. Text messaging and voice consume such little bandwidth that profit per megabyte is not an issue, though other concerns--such as revenue per unit or unit volume--clearly are issues.

Buckets of mobile data usage likely are not particularly troublesome. So long as the service provider understands its costs, prices reasonably in relation to costs and consumers continue to believe the price-value relationship is reasonable, profit margin should not be a particular issue.

The issue is what happens as consumption continues to grow rapidly and consumption is related in some direct way to cost. And then there is Moore’s Law, and its analogies in the bandwidth business.

Long Term Evolution fourth generation mobile networks are desired for any number of reasons, but among them is network efficiency, often said to be at least 30 percent more efficient at supplying megabytes, in addition to providing higher latency performance.

Some might argue LTE is much more spectrum efficient than that, perhaps as much an an order of magnitude more efficient. Others say LTE is a rather minimally more efficient network .

It might yet be reasonable to argue that more mobile capacity will be gained by use of multiple techniques, though, including new spectrum allocations, spectrum sharing, small cell architectures, modulation and air interface changes, offload, retail pricing and packaging and possibly, in some cases, device or app performance improvements.

One study has shown that some  mobile apps consume significantly more data--seven to 21 times more--than the same content accessed using a browser.  It is conceivable more efficiency could be wrung out of app performance.

Still, the demand side changes will be key. If consumers increasingly rely on their Internet connections to consume video, the amount of data consumed will skyrocket, growing a minimum of two to three orders of magnitude in perhaps a decade. If consumption is a product purchased “by the pound,” that will pose a key challenge.

Consumers are unlikely to spend two to three orders of magnitude more money on their Internet access services.

Unlimited pricing of Internet access is where the clear trouble lies, since the service provider easily could find consumers consuming vastly more data than is matched by revenue, putting huge pressure on profit margins.

The revenue per bit problem is easy to describe in another way, in the fixed network domain.

Assume a fixed network ISP sells a triple-play package for a $100 a month retail price, where each component--voice, Internet access and entertainment video--is priced equally (an implied price of $33 for each component).

How much bandwidth is required to earn those $33 revenue components? Almost too little to measure in the case of voice; gigabytes for Internet content consumption and possibly scores of gigabytes for video.

So, by some estimates, where voice might earn 35 cents per megabyte, revenue per Internet app might generate a few cents per megabyte. Recall that actual revenue per megabyte is statistical: it hinges on how much a user consumes after paying a flat fee for the right to use bandwidth.

There are potential analogies in the mobile segment as well.

McKinsey analysts have argued in the past that a 3G network costs about one U.S. cent per megabyte. The problem, in many developing markets, is that revenue could drop to as little as 0.2 cents to 0.4 cents per megabyte, for any mobile Internet usage.

That implies a strategic need to reduce mobile Internet costs to as little as 0.1 cent per megabyte, or an order of magnitude. Tellabs similarly has warned about revenues per bit dipping below cost per megabyte, leading to an "end of profit" for the mobile business.

But some apps arguably require very low prices per megabyte to be viable products, entertainment video being the best example. In such cases, low revenue per megabyte, or low profit margin per megabyte, is a precondition for offering or supporting the product.

So does gross revenue per megabyte matter? Yes, but less than gross revenue per account, device or line. It is doubtful anybody really cares about voice revenue per megabyte. Revenue per device, yes; revenue per account, yes; revenue per user, yes.

Is profit per megabyte important? Yes, especially for retail plans that feature unlimited usage.

Service providers that have moved to some metered form of usage, where consumption and price are somewhat related, might not have to worry about profit margin per megabyte.  

When revenue per megabyte is very high, application bandwidth is very low, customer demand poses few, if any, peak load issues and marginal cost is negligible. revenue per megabyte is not much of an issue.

When does gross revenue per megabyte matter quite a lot? When revenue per megabyte is low, costs of supplying capacity are high, there are serious peak load issues, marginal cost is somewhat high and unlimited usage is the charging method, revenue per megabyte is an issue.

Also, there are instances where low profit margin actually is the desired outcome. Where the alternative is losing an account, low profit margin might be the preferred problem.

In markets where people are using voice and text messaging less than they used to, the telecom industry’s biggest problem is declining demand--not just profit margin. In such cases, lower revenue per service (especially when incremental bandwidth and other costs are quite low) is better than losing an account, since the incremental revenue arguably is more valuable than the actual profit margin.

Also, it can be very hard to determine what profit margins actually will be, in advance.

In many markets, such as the United States, mobile service now comes with truly unlimited domestic text messaging and voice. Actual profit margin depends on how much people use those services. No matter how low the retail price, if a customer uses very little of the resource (sends and receives few text messages, places and receives few calls), actual price per message, or price per call, can be quite high.

The same is true for many other services, including high speed access. Actual profit is statistical. If a consumer pays $20 a month, and talks 50 minutes, the price per minute is 40 cents. At 300 minutes, the price per minute is about seven cents.

And even if some do use the services at higher rates, the volume does not stress the network, and marginal costs are quite low.

To be sure, there are no telecom products other than content services that show an upward-sloping revenue trend.

Aggregate volume is growing but price per unit has been dropping, for virtually all communication services and products.

There is a key observation, though. So long as telecom services are bought “by the pound,” profit margin should be a controllable issue, So revenue per megabyte always matters, at a high level.

At a more granular level, sometimes low margins are a precondition for doing business, though.

Indian State Proposes Public Broadband Company Serving 12 Million Households

The state of Andhra Pradesh in India has proposed creation of a new public company to provide high speed access connections with peak speed of 15 Mbps to twelve million households for as low as Rs 150/month (US$2.40) in the first stage of its about Rs 5,000-crore optical fiber project.

That proposed price is about an order of magnitude lower than retail prices of Internet service providers, which tend to charge about Rs 1,100 per month for speeds in that range.

Andhra Pradesh Fiber Grid Corporation, a public company, aims to provide optical fiber network to villages and remote areas as part of the National Optical Fiber Network project, which is a part of Prime Minister Narendra Modi’s Digital India Initiative.

The NOFN has promised to connect 20,000 Indian villages with optical fiber. As planned, the new network will install 700,000 km of optical fiber nationwide.

Andhra Pradesh has proposed to execute the project at cost of Rs 4,913 crore in five years. The NOFN has earmarked Rs 1,940 crore for Andrhra Pradesh.