New Reality: Gigabit Providers Have to Pick Their Markets

Careful market selection, plus operating cost advantages, arguably are key to all the independent gigabit Internet access provider efforts springing up around the United States. That is as true for Google Fiber as for Rocket Fiber, Ting or any other independent entity.

By definition, capital cost is basically not a source of material advantage: all technology is available to all potential buyers. Construction costs, with some exceptions, also are what they are, for all would-be suppliers. The difference is that some suppliers arguably must use union labor, while others have a choice.

Of all choices, it is the market geography which is most important, at the moment. When Google Fiber decided to build in Portland, Ore., there were no other gigabit ISPs in the market. Now, both CenturyLink and Comcast are doing so, making Google Fiber the possible third supplier in the market.

Some observers think Google Fiber’s decision to delay the Portland, Ore. build, and some in the San Francisco Bay Area, are driven by changing competitive dynamics. Google Fiber arguably once aimed--among other things--to spur key ISPs to upgrade their services.

But now that the ISPs are doing so, it apparently is more difficult for Google Fiber itself to sustain its own operations. Google Fiber arguably has succeeded in getting major U.S. ISPs to boost access speeds. So much so that Google Fiber itself has to rethink its own prospects and business model in many markets, apparently.

In the wake of the Telecommunications Act of 1996, many would-be competitors launched operations where they believed the incumbents would be most vulnerable. For some, that was business customers in tier-two markets. For others, customers in adjacent markets were the obvious targets.

It l

For a brief period, even consumer customers who could be reached using wholesale discounts were viewed as a viable target.

The point is that new gigabit Internet access businesses likely cannot be built "anywhere." Would-be suppliers now must pick their markets, mostly avoiding tougher markets where the incumbents have chosen to upgrade to gigabit speeds.

Market selection always is important for competitive service providers. It likely now is the most-important consideration.

Serving "Last Couple of Billion" Customers Will Always Require Subsidies of Some Sort

Internet service providers normally and naturally are most concerned about how to create facilities allowing people to get access to the Internet. App providers normally and naturally are more concerned with the usability of their products under challenging circumstances.  

So Google’s Next One Billion Project involves app adaptations for markets where Internet access might be spotty, sometimes non-existent and slow. Offline maps that allow users keep track of where they are going, even with no internet service, are one example.

“Light” searchers that will let users in areas with low connectivity do a streamlined search, as well as save and retry their search for when they can get a better internet connection.

Project Link also uses Wi-Fi as a last-mile access media, not simply an in-building distribution media. That approach--using a platform in a new way, not originally intended--is a recurring theme in communications. Wi-Fi now is a major mobile device access method, cable TV now supports

Of course, it is reasonable to point out that 5G, reliant as it will be on capacity supplied by millimeter wave spectrum, will work far better in urban areas than rural areas.

In large part, that is why Google, Facebook and a number of would-be low earth orbit satellite constellations, as well as the existing medium earth orbit O3b, are set to provide new access platforms.

It is highly possible that mobile networks will “always” have a difficult time sustaining operations in rural areas.

But that is why earning high profits some places, to support money-losing operations in other areas, will remain a key task of business strategy for access providers.

Subsidies are going to be as necessary in the future as they are today. That includes third party mechanisms such as advertising and other two-sided revenue models.

Apps Become Services; Services Become Apps

Nomenclature (the names we give things) is among the lesser problems we sometimes grapple with in the communications business.

Still, when the nomenclature changes, it is a sign that the business model has changed, as well.

Consider the phrases “TV as a service” or “voice as a service,” compared to the phrases “TV as an app” or “voice as an app.” Each phrase signals a change in supplier revenue model and customer mode of use.

Traditionally, TV was an “app,” while consumer voice was a “service.” The definitions hinge on whether the product was purchased as a recurring service or created by a product owned by the customer.

But for businesses, voice often was an “app” (they used their owned private branch exchanges to create their own voice services).

For consumers, with the advent of linear subscription TV, that formerly-free “app” become a “for fee” service. Whether something is called an app or a service hinges on the business model.

Some suppliers have pushed the term “voice as a service” precisely to illustrate how a hosted PBX service is different.

Businesses buy PBX equipment to create their own voice, as an app. The supplier business model is hardware sales. The customer use model is “make my own.”

Consumers buy communications as a service, generally speaking. The supplier business model is “sell service.” The customer use model is “buy the service.”

In an era where most consumers in the U.S. market have purchased TV as a service, some now push the idea that TV can be an app (not purchased a service).

The new wrinkle is whether a full on-demand access (pay as you go) can be called an app, even if the content is purchased.

For many, TV remains a “service,” even if a non-linear service (Netflix, Amazon Prime, others), however.

Apps are becoming services; services apps. Each change signifies an attempt to create a different revenue model and mode of usage.

More Competition Should Help End Need for Net Neutrality Rules

The T-Mobile US “Binge On” program neatly illustrates the tough issues inherent in network neutrality rules. The rules themselves allow for network management.

And yet it is hard to distinguish between network management and violations of the rules.

Also, network management is designed to preserve user experience under conditions of high network load. But that is among the aims of programs such as Binge On, which

reduce entertainment video to standard definition to enable unlimited use, while not crashing the network.

One can argue that networks now have so much bandwidth that management is not required, or that the way to avoid network management is simply to invest more capital in networks. Certainly, that approach always is taken, to some degree.

Still, few networks exist in a state of permanent abundance, which would eliminate the need for management.

From time to time, any particular network can be lightly loaded. But success causes load. So unless a network attracts few customers, it eventually becomes susceptible to congestion.

Net neutrality rules were seen as a way to ensure consumer choice (no blocking or throttling of lawful apps). But the rules also prevent consumer choice (no lawful content delivery features, for example). Some also view sponsored apps or data as violations of the rules.

Reasonable people will disagree about those matters.

Still, with the passage of time, we are going to see additional examples of instances where net neutrality and network management, or net neutrality and consumer benefit, will clash.

Many argue that robust competition “fixes” the problem of potential antitrust behavior or exercise of market power. Hopefully that will soon come to be the case for consumer Internet access, and we will not need net neutrality rules, which increasingly will have negative impact on efforts to innovate.

More competition, and more supply, should alleviate the need for the rules.

350 Live Gigabit Networks Globally

There are now at least 350 live gigabit deployments globally, with a further 164 announced or under construction, across wireline and mobile  technologies including GPON, DOCSIS 3.1, G.fast, LTE-A, 5G and 802.11ac, according to Gigabit Monitor, a visual database produced by Viavi Solutions.

North America has the largest share of announced gigabit deployments, with 61 percent. Europe is second with 24 percent. Asia, Australasia, Middle East, Africa and South America share the remaining 15 percent of deployments.

More than 70 percent of the live gigabit deployments tracked have been launched since the start of 2015, and the numbers will skyrocket as 5G networks come online, as those mobile networks will, by definition, offer gigabit to multi-gigabit speeds.

The database, developed completely from public information, is available at gigabitmonitor.com.

Fiber dominates: 85 percent of currently known gigabit deployments are based on optical fiber connectivity, while 11 percent are based on hybrid fiber coax (HFC), the platform used by cable providers.

Over time, it is likely that the percentage of deployments based on mobile and “telecom” platforms will grow, as a percentage of total, simply because cable TV platforms are not widely deployed globally. Mobile platforms should start to grow starting in 2017.

Nearly three percent of known gigabit deployments are based on LTE-A.

Enterprise Spending on Communications is Declining, Excluding Open Source Investment

It should not come as a surprise that in an era defined by software, not hardware; apps, not access; Moore’s Law cost declines for computing, storage and communications, that enterprise spending on communications actually is falling, while spending on various information technology products is growing.

Market share shifts are occurring as well, at least in the U.S. market, where cable TV suppliers are gaining share in business customer markets, and traditional telcos are losing share.

In its first quarter of 2016, Comcast reported a business services revenue increase of 17.5 percent to $1.3 billion, with small business accounting for about 75 percent of revenue and about 60 percent of the growth. In 2015, Comcast commercial services revenue grew 15 percent, year over year.

In the first quarter of 2016, Time Warner Cable grew business services revenue 13 percent, year over year. In 2015, Time Warner Cable commercial services revenue grew nearly 16 percent, year over year.

In 2015, Charter Communications grew its commercial services revenue 22 percent. In its first quarter of 2016, Charter grew its business services revenue  by 12 percent.

Still, according to Gartner, enterprise telecom spending  is dropping, both in the U.S. and global markets. The caveats are that dollar-denominated spending is affected negatively by currency fluctuations.

Also, there is no way to quantify the substitution of open source products for products formerly purchased from industry suppliers. In other words, investment in information technology arguably is higher than the commercial sales figures represent.

In addition, enterprise spending has shifted from fixed network services to mobile services, in very large part.

Perhaps most importantly, such spending analyses do not reflect higher performance at less cost, which means enterprises get higher performance from lower expenditures.

source: Gartner global IT forecast

Can Telecom Be "Uberized?"

Supply-driven pricing is not a totally new concept, if Uber has made it obvious in a new way. Though not priced in real time, electricity, drinking water, airline and many other types of tickets feature prices that vary by time of purchase or other conditions.

We can argue about whether supply-related or demand-related drivers are more common, but historically, pricing differentials to encourage people to use a product “off peak,”, or charge higher prices for higher usage, are relatively common.

Several decades ago, when long distance calling was actually expensive (international calls once cost many dollars per minute), carriers sometimes charged lower rates for off-peak use of the network.

But we have better demand management mechanisms, one can argue. So some argue we should move to on demand access to spectrum.

Google already uses a simple form of supply-driven network access, switching customers of Google Fi mobile service from Wi-Fi to either the Sprint or T-Mobile US network, depending on signal strength and availability.

Some might point to that as an early example of the eventual uberization of network access. That could be good or bad for access providers.

Higher prices when supply is stressed, and lower prices off peak could rationalize the use of spectrum and network resources, without a lot of complicated overhead. Greater efficiency, at low cost, would be helpful for suppliers.

On the other hand, the ability to shift supply from one network to another could decrease the scarcity value of any network resource. In that sense, there would be greater price competition amongst suppliers of access services.

It is hard to divine the impact on value of spectrum assets, as there are other very-big supply-related changes coming (spectrum sharing, unlicensed spectrum, millimeter wave spectrum).

source: Yvetter Romero (darker bars represent US market share only; llight shaded bars are addressable on-demand market)

Much could depend on which part of “uberization” winds up applying most: surge pricing, demand shifting or supply shifting. Surge pricing--with its impact on demand shaping--might be most benign for suppliers, as it is simply an efficient way of rationing assets at times of high demand, or encouraging network use off peak.

Supply shifting--moving usage from one supplier to another in real time--is likely to be much more disruptive.