Is Internet Access Business Sustainable?

Is the Internet access business sustainable--able to earn a return exceeding its capital investment--at the moment, or over the longer term? It’s a key question, and at least some analysts think the answer is “no.” 
Others disagree.

“We haven’t actually got a sustainable system at the moment,” Dr. Neil Davies, Predictable Network Solutions principal, says.

It’s a “crisis for the world’s telecom industry, in that they are not being able to construct the returns on investment they need for the capital,” he notes. That’s one view.

Others suggest the access business is stable and profitable, at least relatively recently,

source: Washington Post

Comcast, supposedly the greatest cable monopolist, averaged just a 4.5 percent return on invested capital for the five-year period from 2007 to 2012. The Time Warner Cable five-year average is -1.3 percent, some would note.

The problem, in essence, is that the switched telephone network, because of its design, actually enabled control of quality in ways that Internet Protocol architectures actually prevent.

For those of us who are more “business types,” the reasons for those conclusions are the domain of “bit doctors” who understand statistical multiplexing and its implications for large networks. But if I understand the argument correctly, the problem is that the IP architecture effectively removes the ability to control quality, on the part of any single domain within the broader network of networks.

Simply, no single domain owns or controls all the other elements that affect quality. So quality itself cannot actually be guaranteed. And if capital investment to protect or enable quality becomes nonlinear, with unknown results, then costs cannot be determined, for quality of service of any expected level.

It then becomes difficult to set retail prices at levels that recover, with certainty, the cost of investments. As the protocols are statistical, so profit and loss become statistical.

One salient implication might therefore be that no single domain actually can be certain that its own investments in network quality actually will have the desired results.

In the switched telephone network, there was a clear cost identifiable for every connection because all the resources along that path were now associated and reserved for that data stream. That is not actually possible with an IP network.

In the past, bits flowed along a fixed circuit, with one key advantage. A service provider could derive the actual cost of doing so, and price accordingly.

Packet networks are based on virtual and statistical processes at every turn, essentially. That means there are contention and congestion mechanisms happening “all over the place.”

In practice, this means no broadband provider can ever guarantee the quality and performance of the end-to-end transmission chain.

The corollary is that access providers might not be able to determine the cost of doing so, either, at least when levels of quality are part of the offer, and when there are performance guarantees, with financial penalties.

5G Changes Everything

If you look at all the capabilities the coming fifth generation (5G) mobile network will have to support, and 5G relationship to the core network, you’d have to conclude that 5G is the “network of everything.” It will have to support low, medium and high use cases for bandwidth, latency, mobility, battery life and reliability.

The proposed 5G network will have to be location and context aware; flexible; efficient; secure; energy efficient; software optimized and therefore virtualized.

The new network will share spectrum and networks.

In other words, 5G will change the whole network, not simply air interfaces.

Mobile App Revenes to Double, Access Revenues Will Fall 9%, Between 2013 and 2020

Global aggregated statistics, though useful, can hide significant regional or ecosystem differences, it always is fair to note.

Nice upward-sloping bar charts are compelling at a high level, but can obscure other trends. In the earlier parts of a lifecycle, such bar charts give the illusion of solidity. Only later, when growth tops out, and decline begins, do we see the expected full product lifecycle curve.

Also, many other trends often occur below the “headline” numbers. Consider the relative revenue shares in the mobile ecosystem, for example. As virtually all the participants are aware, shares of overall ecosystem revenue are shifting.

In 2013, mobile service providers claimed 59 percent of ecosystem revenue, app providers 10 percent of total revenue. By 2020, the GSMA estimates, service providers will earn half of ecosystem revenues, while app providers earn 20 percent of ecosystem revenue.

The global market still is growing, as many potential customers remain to be gotten. But, as tends to be the case, the incremental new users represent less revenue per account. And, inevitably, the market will saturate, rather sooner than many expect.

The key ecosystem change: app share of revenue doubles while access revenue declines nine percent.

source: GSMA

source: GSMA

There is no Net Neutrality for Wi-Fi, Which Increasingy is Going Carrier Grade

Perhaps oddly, given all the attention to network neutrality as applied to Internet access providers (mobile and fixed), it is Wi-Fi where the balance between “best effort” and “assured access” or carrier grade paradigms will be most important.

At least according to Rethink Research, there will be more “carrier grade” Wi-Fi hotspots than “best effort” hotspots by 2017. That means a majority of hotspots will use prioritization mechanisms.

So with or without network neutrality rules, hotspot providers will be able to groom traffic and take other measures to provide consistent user experience.

O3b Says it is the Fastest-Growing Satellite Constellation Ever

O3b Networks says it has become the fastest growing in satellite history, selling more capacity in the inaugural year of operation than any other satellite operator with global operations.

O3b also says it has sold capacity equivalent to nearly 10 percent of the contracted capacity of the three largest Fixed Satellite Service (FSS) operators combined.

O3b says it now is providing transport to 40 customers in 31 countries, supporting  mobile operators to expand 3G and 4G/LTE services to rural populations; ISPs to provide true broadband on isolated island chains; cruise lines to bring guests and crew high-speed broadband and mobile connections; oil and gas companies to reduce costs and improve crew welfare and governments.

The O3b Networks Medium Earth Orbit (MEO) satellite constellation greatly reduces latency and helps the constellation provide extremely high throughput.

Other contestants likewise are lining up to supply services using even lower orbits, despite some skepticism from providers of geosynchronous service, as one would expect, since MEO and LEO constellations pose new competition (and some would say better user experience).

Australia Orders 9.4% Lower Wholesale Acess Prices for Copper Network

The Australian Competition and Consumer Commission has ordered a 9.4 percent decrease in wholesale access prices on the Telstra copper access network, beginning on No. 1, 2015, and continuing until June 30, 2019.

That decrease, despite fewer customers on the network, incorporates other changing input prices.

Downward pressures come largely from lower expenditures, falling cost of capital and impact of migration of users to the National Broadband Network.

These more than offset upward pressures from a shrinking fixed line market due to consumers moving away from fixed line services and to mobile services, ACCC Chairman Rod Sims said.

The ACCC noted, however, that fewer customers on the copper network will mean higher costs to serve the remaining customers.

That is a generic issue for many fixed network operators. Sowmyanarayan Sampath, Verizon Communications SVP of transformation says Verizon’s copper-based revenue is declining eight percent to 10 percent a year.

At that rate, the revenue stream disappears in a decade. The business will have become unprofitable long before then. Some might argue the business already is unprofitable, if allocated overhead is included. Others would argue the business is slightly profitable, but getting worse as more customers churn off the network.

Verizon might have operations spanning 150 countries, but its revenue is highly concentrated in the U.S. mobile business. By 2016, the mobile business is likely to account for 85 percent of Verizon earnings (EBITDA).

In 2014, mobile contributed 70 percent of revenue, so mobile is generating an increasing share of earnings.

Comcast Continues to Grow Bandwidth at Moore's Law Rates

As crazy as it seems, U.S. Internet service provider Comcast, now the biggest supplier in that market, has doubled the capacity of its network every 18 months.

In other words, Comcast has  increased capacity precisely at the rate one would expect if access bandwidth operated according to Moore’s Law.

U.S. telcos have generally not been able to increase speed at such rates. That, in large part, might account for Comcast’s leadership of the Internet access market.

That said, across the whole market, access bandwidth has grown at rates very close to what one would expect if Internet access were governed by Moore’s Law.

source: IP Carrier