Multiple Networks Needed to Support Smart Cities, Says GSA

source: ABI Research

Perhaps predictably, the GSA has authored a white paper on the central role of communications in smart city efforts.

Also predictably, the GSA, representing the interests of platform suppliers of many types, supporting rival IoT platforms, argues that an “all of the above” approach will be needed.

“Multiple networks are required to underpin the smart city,” GSA argues. “A cellular network is highly unlikely to be able to deliver appropriate connectivity for every smart city application, even if it is able to satisfy many requirements.”

“Even with the emerging narrowband IoT (NB-IoT) networks and partnerships with competing IoT LP-WAN providers, for the foreseeable future, a smart city will use multiple network technologies,” GSA argues.

source: GSA

An appealing a political statement for an organization that has to support all its members, the position also is unlikely to happen, on a wide scale, when IoT services and networks actually are commercially deployed on a mass scale.

By definition, and excluding the potential role for mobile networks, most of the proposed IoT networks are rivals and substitutes, featuring low data rates and low power consumption.

The GSA’s argument is not without a rationale. Underpinning every IoT service, application and network is a physical transmission layer of some sort.

What is less clear are the business models and “killer apps” that will dictate what services make sense and are sustainable, and what mix of public and private investment will be possible.

But at least some forecasters believe “smart cities” apps will be a leading segment of the market, driven at least in part by traffic management and other infrastructure concerns. Almost certainly, those hopes will fail to match the optimism.

The reason is simply that the “smart cities” category is an amalgam of many different potential markets, across many industries, some amenable to public investment, while others are contingent on investment by many private entities.

source: GSA

source: Compass Intelligence

source: IC Insights

Hosted PBX or Hosted UC Might be Substantially Uncompetitive at Firms Representing Nearly 70% of Workers

When market researchers aggregate a whole bunch of different revenue streams together, and then call them all “one market,” it is a clear sign that each of the constituent markets is small. Only by aggregating can a market of reasonable size be shown to exist.

That arguably is the case for a host of services collectively lumped into the hosted UC or hosted PBX category.

In 2008, the combined business phone system, conferencing, messaging, unified communications, contact center, collaboration, rich media, email and calendaring markets collectively amounted to perhaps $29 billion globally.

By 2014 the market perhaps had shrunk to perhaps $19 billion, according to some estimates.

In fact, despite hyperbole about “huge new markets,” the truth is that the broad UC and IP communications businesses are not that big. In fact, one might argue that traditional business voice systems are a flattish business, while all manner of software-based services might be where the growth is happening.

Bottom line, is the market still growing? Probably, but only because so many categories are lumped together. As sales of business phone systems fall, hosted alternatives still seem to be growing, if rather slowly, on a global basis.

Hosted PBX revenues globally might only be in the $10 billion range, meaning the market is small, in most countries. If the U.S. market represents half the world total, then hosted PBX represents $5 billion or so in annual revenue. That is significant for some specialists, but a small bogey for the whole U.S. service provider market.

Also, a significant portion of reported “hosted UC” or “hosted PBX” revenue actually consists of SIP trunking, an access service, not a “voice” service. By some estimates, North American hosted PBX revenue--subtracting out the access portion--might be about $4 billion annually.

The ultimate issue is total potential market size, and what percentage of that total hosted services can address. Some estimate the total addressable North American market is about 140 million business lines, for all solutions. So far, hosted services have gotten about 12 percent of that total.

It still might be useful to estimate what percentage of hosted services adoption is reasonable, since, at some point, it still appears that “owning” phone systems, rather than “renting” services, makes sense.

Most workers (more than 70 percent) are at firms that have been in business six or more years. Roughly speaking, you can assume that roughly 70 percent of demand for “lines” and services therefore also exists at those firms.

Nearly 40 percent of all U.S. employees work for firms of at least 10,000 employees. Those are the employees working at firms most likely to benefit from “owning” switches rather than renting services, for the most part.

At least so far, most hosted PBX adoption has occurred at firms with fewer than 50 employees, nearly 70 percent, by some estimates. Roughly 17 percent of hosted PBX adoption occurs at firms with 50 to 500 users, while 15 percent of demand has come from firms with more than 500 users.

And that points to an apparent limitation. Only about 25 percent of business employees work at firms with 100 or fewer employees.

If the economics of owning versus renting services do not change much--if it continues to make financial sense for larger enterprises to won their switches, then a substantial part of the business communications market will remain largely “off limits” for hosted services adoption.

It will continue to make sense for small, young and fast-growing firms to choose a hosted solution. The issue is simply that most people work at large firms where hosted alternatives are not necessarily cost competitive, whatever “soft” advantages (moves, adds, changes) exist.

source: Frost and Sullivan

                   Distribution of Total Private-Sector Employment by Firm Age

source: Third Way

Distribution of Employment at 16+ Year Firms by Firm Size

source: Third Way

source: Frost and Sullivan

source: Infonetics Research

source: Unis Lumin

source: Cincinnati Bell

source: Commfusion

Whatever you think might be happening in the broad “unified communications or business voice” markets, one fact has not changed over the last decade: as important as the segment is for some suppliers in the market, the categories are relatively small, within the context of the whole communications market, or even within the business communications segment.

OTT Now Attacks a Wider Range of Telco Revenue Streams

Internet Protocol and over the top software attacks current telecom service provider revenues and profit margins on an ever-wider basis.

Content encryption has eliminated nearly 60 percent of the video and audio optimization market in 2015, according to ABI Research. That eliminates a major opportunity for Internet service providers to provide “quality of service” or quality-related management of  those streams.

“Moving forward, telecom operators and vendors need to make significant and strategic operational moves to protect network performance and create a competitive advantage with streaming media entertainment,” says Joe Hoffman, ABI Research VP.

It is going to get worse. “We expect 85 percent of traffic to be encrypted,” said Hoffman.

“With encryption here to stay, operators need new tools to manage mobile broadband traffic,” says Joe Hoffman, Managing Director and Vice President at ABI Research.

Those new methods will be designed to work even with encrypted media streams.

Also, consider the revenue impact of software-defined wide area network services.

SD-WAN allows the creation of an over the top intelligent network infrastructure that aggregates transport from any number of providers or physical connections.

Enterprises can run their own software-defined wide area networks, using that control to

Apply least-cost-routing more easily, or highest-quality-routing.

That enables high-margin MPLS connections to be replaced with commodity Internet connectivity , to some significant extent.

Software-defined WAN capabilities also reduces enterprise customer loyalty or provider lock-in by establishing an “abstraction” layer above the network, controlled by in-house IT teams or competing managed service providers.

So the potential threat is a reduction in MPLS & other WAN services revenues, as well as lower potential united communications “as a service” or managed security services as well.

Verizon Strategy Right in Terms of Function, Wrong in Terms of "Core Competence"

Sooner or later, the notion of traditional service provider “core competence” where it comes to  running networks--already challenged--is going to be severely tested within the Internet ecosystem.

“Core competence” implies not only that an entity is good at doing some things, but that an entity has a unique ability to so those things, in ways that others cannot emulate.

Viewed that way, no single mobile operator has a “core competence” where it comes to building or operating mobile networks, by definition. Others can, and do, routinely do so as well.

That has become increasingly true in the fixed network business as well, as cable TV operators, Google Fiber and third-party Internet service providers provide identical services, and operate their own networks.

In other words, perhaps “running networks” is not really a core competence. If so, Verizon and other traditional access providers are going to face huge headwinds.

Managing access networks arguably is a “key role or function” provided by an ISP, whether that is a core competence or not.

There is a reason the seven-layer Open Systems Interconnect model has access at one layer and apps at the other end of the stack.

The functions are distinct, even if any single provider might not have an actual “core competence” that is unique, within its role.

In other words, “things we do” within the ecosystem is a valid concept, even if “core competence” is less clear.

“The one thing that I try to think about is core competency,” said Verizon CEO Lowell McAdam. “And I'd put our team up against anybody in the world on the network side.” Few would disagree with that statement, as far as it goes.

“The connectivity layer is where we feel we need to be dominant,” said McAdam.

But here’s a key follow-up statement: “ As you go up into platforms and things like content, it's not exactly our strong suit.”

In other words, Verizon’s strategy is to be “dominant” as an access provider, and then be “a player” in at least some of the applications that require access.

In principle, that is a very-sound strategy. It is the strategy embraced by cable TV providers, who likewise might argue they need to be dominant access providers, but also own at least some of the apps they deliver.

Still, over time, a number of trends suggest that the access function might be less a matter of scarcity than has been true in the past.

There are going to be more providers (cable TV already has the largest market share in the U.S. Internet access business).

There are going to be more ways to source access (Wi-Fi, new high-throughput satellite constellations, fixed wireless, balloons, unmanned aerial vehicles).  

There is going to to be much more capacity (more providers of gigabit fixed access and much more wireless spectrum).

And the cost of being an access provider is going to drop. As that hurdle gets lower, a wider range of potential business models becomes possible.

All of that erodes whatever advantages an access specialist might believe it possesses. So, in one sense, Verizon’s strategy is strategically flawed. It does not actually have a “unique and hard to replicate core competence” in access.

Others have done so, and more will do so in the future.

Still, Verizon is correct, in another sense. Like cable TV operators, the revenue portfolio will be a mix of selling access, and owning at least part of the content delivered over that network.

“Core competence” is not necessarily the issue. Key function is the issue. Verizon will build on its access function, adding app roles. Like many other big participants in the ecosystem, Verizon will participate at multiple layers or segments within the ecosystem.

But Verizon might not have a unique capability in any of those roles.

Set-Top Market is Small and Declining, Why Bother Regulating It?

The set-top box market is on the decline, expected to drop by about nine percent in 2016 to less than $16 billion in revenue globally, according to researchers at ABI Research.

Under the best of circumstances, the North American market for set-top boxes is rather small, representing less than $7 billion in annual turnover for all video service suppliers, annually, and perhaps $6 billion in the U.S. market, as the Federal Communications Commission explores methods of opening up the market to competition.

“The market is experiencing significant downward pressure on set-top box pricing,” says Sam Rosen, ABI Research VP. “Hardware revenues will fall.”

All that at a time when virtually everyone believes the linear video market will continue to be in decline, as over the top streaming services, which require little in the way of “dedicated decoder” support, will simply use standard IP-capable screens.

source: Grandview Research

The point is that regulating markets in decline tends to be a poor use of regulatory effort. In fact, if anything, a light touch is required, as declining markets tend to feature “underinvestment” as a rule.

The other issue is that spending time on small and declining markets likewise is an inefficient use of regulator time and effort, as such markets are, by definition, relatively inconsequential and, in any case, are destined to shrink over time, in any case.

Whatever one thinks about the degree of competition in the set-top decoder market, it is a small industrial product segment that is declining in value. Regulators undoubtedly have many bigger issues to confront than that.

Consumers probably are not interested in "owning" clunky boxes whose only function is to provide channel tuning and conditional access for linear video service. Set-tops are industrial products of little, if any, intrinsic value to consumers. They are not phones. Not even music players or cameras. Who cares, really, about "owning" such industrial products?

Content Encryption Limits ISP Ability to Manage Network Performance

Content encryption has eliminated nearly 60 percent of the video and audio optimization market in 2015, according to ABI Research. That eliminates a major opportunity for Internet service providers to provide “quality of service” or quality-related management of  those streams.

“Moving forward, telecom operators and vendors need to make significant and strategic operational moves to protect network performance and create a competitive advantage with streaming media entertainment,” says Joe Hoffman, ABI Research VP.

It is going to get worse. “We expect 85 percent of traffic to be encrypted,” said Hoffman.

“With encryption here to stay, operators need new tools to manage mobile broadband traffic,” says Joe Hoffman, Managing Director and Vice President at ABI Research.

Those new methods will be designed to work even with encrypted media streams.

Will 5G Enable New Birth of Fixed Wireless Business?

Fifth-generation mobile networks might be more strategic than you might think, boosting both the value of wireless access and the fixed network. It is easy to focus on the "gigabit per second to every mobile device" 5G is designed to support, with higher speeds up to 5 Gbps or 10 Gbps conceivable in some scenarios.

In addition to making mobile access speeds competitive with--or higher than--fixed networks in many instances, 5G might also allow some Internet service providers to rethink access architectures, in region and out of region.

Verizon, for example, now is studying ways to use fiber backbone networks, especially out of region, to anchor fixed wireless access, in much the same way that competitive local exchange carriers long have operated. 

The same approach could work in region, where Verizon does not intend to build dense optical access networks, but might have greatest value out of region, allowing Verizon to leverage fixed network facilities in new ways.

Looking only at "out of region" opportunities, Verizon might be able to leverage new core optical networks acquired from XO Communications, with fixed wireless, to reach many business customers, at lower costs, than ever before.

The access services business model, in other words, could change with the advent of 5G, especially for business customers out of region, or for some consumers, in region, where Verizon does not intend to build FiOS fiber to the home networks.

5G fixed access might also allow Verizon to serve some customers, even where it does build FiOS, who cannot be reached by fiber to home facilities, for cost reasons.

When you have firms including Facebook, Google, Verizon and AT&T all looking at fixed wireless, and AT&T publicly committed to adding as many as 13 million new connections using fixed wireless, you know something has changed.

Fixed wireless is not new, as a concept. It has been seen as the solution for any number of business models, ranging from multi-channel video delivery to Internet access to consumer and business voice. It never has gotten much traction, as a percentage of industry connections.

That could change, dramatically, over the next decade, for several reasons. First, most Internet service providers now acknowledge that fiber to the home is not always the best “use everywhere” platform for high-bandwidth (gigabit) services. In areas where demand is spotty or light, fixed wireless will be a better option, in terms of a sustainable business case.

Second, suppliers--notably the potential ISPs themselves--are working on ways to make fixed wireless work better, at higher frequencies, at lower cost, and have gotten significant support from traditional equipment and platform suppliers, in some cases.

Third, the strategic role of fixed networks now is evolving in a way that makes them backhaul networks, allowing more-affordable “fiber to where you can make money” deployments that, in turn, can use fixed wireless instead of cabled drops.

That strategy is not new, either. Many metro fiber businesses long have built fiber rings to underpin access operations, gradually extending spurs off the rings to reach actual customers.

In a clear sense, fiber networks (metro ring or transport and access) now are going to play the same function in the consumer business. Fiber backbones will have subtending fiber distribution rings or spurs, which will in turn terminate close enough to customer locations that fixed wireless can be the drop (access).

That, fundamentally, is a variant of the hybrid fiber coax network design, fiber to the curb or fiber to the neighborhood architectures, perhaps beginning with services aimed at business customers, especially small or mid-sized businesses.

Now Verizon has begun to talk about using 5G networks in a fixed mode, supported by optical fiber backhaul.

“I think the problem that the telcos have had is a DSL service is really not going to keep up with DOCSIS and so we’ve had to do fiber, and fiber is expensive for all of us,” McAdam notes. “So if you think about it if I can get we than say a 1,000 meters of a business and I give them a router, a basic router that has a 5G service inside it, and I’m up and operating immediately.”

“If you look at 5G in a fixed wireless environment we've demonstrated for some of our shareholders in our Basking Ridge facility putting 1.8 gigs into the house without a wire,” said McAdam. “Think about the difference for the carrier and the cost structure.”

In principle, assuming the acquisition of XO Communications is approved, Verizon will be positioned as a competitive local exchange carrier “out of region,” as XO Communications has fiber rings in 45 of the top 50 U.S. markets.

“That gives you the ability to be out into those markets and then you just run your extensions off of them,” said McAdam.

Though we are early in the process, it appears fixed wireless might be poised for its biggest-ever role in U.S. access operations.