5G Networks are "Completely Different"

Fifth-generation mobile networks are coming, but even the nomenclature underplays the magnitude of the shift. The shift from first generation to second generation was the shift from analog to digital.

The change from second generation to third generation was about data capacity and potential new apps. The move to fourth generation was about speed.

 

“5G is completely different,” said Australian consultant and former regulator Bob Horton. “5G is a convergence of mobile, Internet and Internet of Things,” Horton said at the Spectrum Futures conference.

In fact, the notion that 5G primarily is about “speed, throughput and mobile broadband” is a bit of a myth, said Reza Arefi, In tel director of spectrum strategy. In fact, 5G also is about applications and especially low-latency applications.

“An autonomous vehicle can generate a gigabyte of data each second,” said Arefi. Some of that processing is required because a vehicle has to detect and respond quickly to obstacles, traffic lights and the presence of pedestrians.

5G also is proving to be the impetus for an unprecedented expansion of bandwidth available for communications purposes. In addition to use of spectrum below 6 GHz, 5G is going to use spectrum at 28 GHz, 34 GHz, 37 GHz, 38 GHz and 60 GHz, said Arefi.

One way of comparing the amount of bandwidth is to note that today’s 4G Long Term Evolution services use 20-MHz channels (sometimes less). At 28 GHz, channels will be 100 MHz wide, and it will be possible to aggregate as many as eight such channels, implying the possibility of 800-MHz channels.

What that means is much higher bandwidth, as bandwidth efficiency varies directly with the amount of spectrum available and the amount of contiguous spectrum. As much as 90 percent of all potentially usable communications spectrum lies in the millimeter wave regions between 3 GHz and 300 GHz.

In fact, the U.S. Federal Communications Commission already has said it will authorize new communications spectrum representing 29 GHz of additional capacity. Keep in mind that all presently-available mobile and Wi-Fi spectrum totals less than 1 GHz of capacity.

AT&T Shows Ir Understands How to "Move Up the Value Chain"

AT&T’s purchase of Time Warner might not make sense to some, but it illustrates a very simple strategy for “moving up the value chain.” In fact, the move matches the general way cable TV companies approach strategy related to its “dumb pipe” Internet access operations.

Simply, the strategy is that “you have to own at least some of the content delivered over your pipes and used by your customers.” That was the thinking when Comcast purchased NBC-Universal, for example.

That strategy obviously now is at least partly embraced by AT&T, which now is the largest supplier of linear video TV service in the U.S. market. Like Comcast and other cable TV operators, AT&T faces slow attrition in the core linear TV business. So linear video suppliers are transitioning to a different market, where over the top video is dominant.

For obvious reasons, mobile service providers are more optimistic about the role of mobile-consumed video than cable operators are willing to admit in public.

In any case, OTT means pressure in the “dumb pipe” Internet access business (prices per unit are falling) can be partially offset if pipe operators also own and benefit from revenue generated by ownership of content.

That also suggests an approach to other applications and services as well, outside the content area. Large Internet service providers will want to explore how they can become owners of at least of the popular apps used by people.

An analogy:Today, ISPs sell tickets to enter a theme park. What consumers want is the theme park attractions (all the things one can do on the internet). By owning at least some of the content or applications people want to experience inside the theme park, ISPs can avoid become sellers of tickets to enter the park, when competing with others who also sell admission tickets.

That is not to downplay the need to operate and upgrade the core “dumb pipe” access business. Indeed, high speed access will eventually become the foundation service for any service provider, even if “applications” also are key products (voice, messaging, content).

Historically, the ability to use such apps “untethered” also has been a value and revenue driver. Mobile voice has value beyond that of fixed voice, and will continue to hold that value over time. But there are now other ways to gain untethered access, including Wi-Fi, that diminish the formerly-exclusive value of mobile access.

So ISPs now operate in a context where they are multi-product suppliers. There is a distinct “Internet access” or dumb pipe business (tickets to the theme park) as well as the separate application and content businesses (voice, messaging, video, content, banking or payments).

AT&T’s Time Warner purchase is an example of it following the principle that “you have to own at least some of the content delivered over your pipes and used by your customers.”

How Much Could Yahoo Boost Verizon Revenues?

Scale matters for consumer social apps as much as it does for mobile service providers, cable TV companies or fixed network telcos. Among other reasons, scale means more customers, more accounts and therefore more gross revenue.

Facebook’s average revenue per user rose 33 percent year over year to $3.32 in the first quarter of 2016. That implies annual revenue per user of perhaps $13.28.

Scale therefore means that every million users Facebook gets should contribute $13,3 million in revenues. Facebook added about six million users in the first quarter of 2016, for example. So Facebook likely grew revenues $79.8 million for the quarter, and therefore as much as

$319 million over a year from that user cohort.

Worldwide, there are over 1.71 billion monthly active users, a 15 percent increase year over year.

The value Verizon can produce from adding Yahoo to its AOL unit likewise hinges on the value of scale.

If one assumes Yahoo can earn $6 per user per year from 800 million users, that implies about $4.8 billion in annual revenue. If Verizon annual revenue is at least $124 billion a year, then mobile advertising lift from Yahoo could be nearly four percent of revenue.

Assuming Verizon can continue to do at least that well, you get some idea of the  lift Verizon might expect, near term, as Verizon tries to position its AOL unit as an alternative to Google and Facebook for mobile advertising.

With the caveat that Verizon had a worker strike that affected second quarter results, it might be worth noting that the second quarter revenue decline was about $1.6 billion, with Yahoo in principle representing about $1.2 billion in quarterly revenue.

Whether Verizon can grow Yahoo users and maintain or raise revenue per user is the test of value, going forward. Scale, in other words, is the upside.

source: .benphoster.com

Some might argue the Yahoo acquisition will not help Verizon that much, especially if the core asset depreciates, instead of appreciating. But if it works, the mobile advertising push conceivably could generate eight percent of total Verizon revenues. That is material.

Hard Work, Moore's Law, Human Cleverness for Breathing New Life into Many Legacy Platforms

At one point a couple of decades ago, even sophisticated access technologists might privately have thought standard twisted-pair cables used by telcos would not work reliably enough to deliver 10 Mbps to scores of megabits per second.

By the same token, many would not then have believed cable TV hybrid fiber coax networks capable of reaching hundreds of megabits per second, much less gigabit speeds. But credit hard work, technical cleverness and Moore’s Law for breaking all those limits.

Swisscom is deploying G.fast, which allows Swisscom to reach transmission speeds of up to 500 Mbps on networks with relatively short copper drop cables and optical fiber distribution networks.

That deployment is part of a process whereby legacy networks are upgraded to deliver bandwidth that once was thought “impossible” on telco legacy copper drops, cable TV hybrid fiber coax, fixed wireless or mobile networks

Better radios, signal processing and advanced modulation techniques, plus new architectures, are also are contributing to the way mobile and fixed wireless networks is improving

In the medium to long term, Swisscom intends to supply 85 percent of all Swiss households and businesses with bandwidth of at least 100 Mbps by the end of 2020.

Sprint Makes Progress

Long-ailing Sprint seems to be making operational progress, growing operating income, adding postpaid accounts and reducing churn.

Unaudited Sprint preliminary financial results for its second fiscal quarter of 2016 (three months ended September 30, 2016) show progress.

Total net operating revenues of $8.25 billion grew three percent year-over-year and wireless net operating revenues of $7.85 billion grew nearly five percent year-over-year.

Sprint said it lost $142 million in the third quarter, compared with a loss of $585 million in the same months of 2015. Operations profited by $622 million, though the operating profit total ignores some costs such as debt repayments or interest payments

The company added 740,000 subscribers during July, August and September, including 344,000 in its higher-revenue customer counts. Sprint reduced postpaid churn, which dipped from 1.54 percent last year to 1.52 percent this year. The carrier noted postpaid phone churn for the latest quarter hit a company record low of 1.37 percent.

With T-Mobile US driving its financial and operating results and taking market share in the U.S. mobile market, and Sprint doing better, one has to wonder if AT&T and Verizon will show a bit of weakness in their next quarterly reporting.

Beyond that, there are the coming market entries of Comcast and Charter Communications, as well as the unknown strategy Dish Network will employ, either entering the mobile market or selling its spectrum assets.

One way or the other, further turbulence lies ahead.

Top US Wireless Carrier Metrics Q2 2016 (ranking by subscribers, retail + wholesale)
Rank by             Subscribers	Carrier	Subscribers (millions)	Net Adds (millions)	Postpaid Smartphone Net Adds (mil)
1	Verizo n Wireless	142.754	1.285	0.336
2	AT&T	131.805	1.361	0.250
3	T-Mobile USA	67.384	1.881	0.877
4	Sprint	58.446	-0.360	0.259

source: Jackdaw Research

Is Spectrum Value Growing, Flat or Declining?

Is the value of spectrum in the U.S. market flat, increasing or declining? It’s a hard question to answer in the abstract.

It all depends on which frequencies we are looking at, the specific value to potential owners who might buy spectrum, and other issues such as the amount of spectrum, the contiguity of the spectrum and the other alternatives which might be available to provide desired spectrum assets.

It might be fair to say there are big disconnects, in some cases.

Some have estimated the total value of 2.5-GHz spectrum held by Sprint at $115 billion or so. Others might argue that all of Sprint’s spectrum is worth around $60 billion.

It is worth noting both those figures exceed Sprint’s total market valuation of about $28 billion, in the third week of October 2016. Somebody is wrong, by quite a lot.

“We estimate that Sprint is valuing principally 2.5 GHz spectrum at $1.85/MHz/POP, which is more than six times the $0.30/MHz/POP it effectively paid for this spectrum when it acquired Clearwire in 2013,” says BTIG equity analyst Walter Piecyk.

How much is Dish Network spectrum worth? Observers continue to argue about the matter.  

Analysts at Kerrisdale Capital have argued that demand for Dish Network’s spectrum is wildly optimistic, and that spectrum prices are headed dramatically lower.

Others have argued that the spectrum represents most of the equity value of Dish Network as a whole. Some have pegged the mobile spectrum licenses as 80 percent of Dish equity value, based on a valuation of $35 billion to $50 billion for the spectrum licenses.

By some estimates, facilities-based U.S. mobile operators, plus Dish Network, own about $368 billion worth of spectrum licenses.

AT&T now holds spectrum licenses worth more than $91 billion, estimates Goldman Sachs analyst Brett Feldman, while the value of Verizon’s spectrum is $79.4 billion.

In all, AT&T now holds spectrum licenses worth more than $91 billion, estimates Goldman Sachs analyst Brett Feldman. He also estimates the value of Verizon's spectrum at $79.4 billion.

The current equity value of all AT&T stock is $176.5 billion, implying that spectrum alone represents 51.6 percent of AT&T’s total equity value.

Verizon’s market value is $207.9 billion, implying that Verizon’s spectrum represents 38 percent of total valuation.  

Bloomberg Intelligence has estimated the total value of Sprint’s 2.5-GHz spectrum alone at $115.1, about 2.4 times Sprint’s enterprise value of $48 billion.

In fact, some have argued that T-Mobile US spectrum accounts for more than 100 percent of its total market value.

Sprint apparently values 14 percent of its spectrum holdings at $16.4 billion as part of a recent sale-leaseback of spectrum.

That implies a total valuation of spectrum at about $117 billion, or about four times Sprint’s present market capitalization. Clearly there is a huge variance; some might say a disconnect.

Either Sprint’s spectrum is not worth as much as it claims, or the market is seriously undervaluing Sprint as an asset.

Dish Network has a huge interest in spectrum valuation , as it holds a significant block of mobile spectrum that must either be put to use, or sold, or returned to the government.

“If we valued Dish’s core business at five times the consensus 2016 EBITDA estimate and $1.85 per MHz per POP it would imply a value of $106 per share for Dish and $85 per share if we taxed the gains from a sale of spectrum at that level at 35 percent,” Piecyk argues.

In the third week of October 2016, Dish Network’s equity is selling for about $57 a share. Again, there is a disconnect between implicit spectrum value and equity value of the whole business using--or potentially using--that spectrum.

So the value of mobile spectrum matters especially for a few firms (Dish Network and Sprint, in particular) that are monetizing, or hoping to monetize, those assets.

The specific value of existing spectrum matters less to AT&T, Verizon and T-Mobile US, as it is an asset meant only to support the business model, and not being collateralized (Sprint) or potentially monetized (Dish Network).

Will Amazon Become an ISP?

Ironically, as Amazon reportedly ponders becoming a retail Internet service provider in the United Kingdom or Germany, the broad implications of mandatory wholesale again come into perspective.

The attraction for Amazon of becoming an ISP: offering a bundle of Internet access and Prime video, essentially making Amazon a dual-play competitor to both telcos and cable companies.

The point arguably is to boost Prime uptake, more than the attractions of revenue earned by supplying Internet access.

Such a move, already taken by Google Fiber in the United States, has not been directly matched by Facebook, which is focusing more on backhaul platforms that work with mobile operator efforts. Google’s Project Loon presently contemplates a backhaul role, with mobile operators being the retail access providers.

The broader background issue is the role of wholesale access in the access business, which varies by country. On one hand, the robust wholesale regime allows many retailers to enter a market.

About 80 percent of retail U.K Internet access accounts are supplied using BT’s wholesale network. About 20 percent is supplied by Virgin Mobile, using its own network.

In Germany, perhaps 17 percent of total Internet access connections in early 2015 were supplied by cable networks.

In France, where most fixed network Internet access connections happen over the Orange network, using wholesale mechanisms, perhaps four percent are supplied on cable TV networks.

The point is that most retail ISPs, building their business on wholesale access, make a trade off. They gain the ability to supply access, without building their own expensive facilities, at the price of losing control of their access costs and features.

source: ARCEP

As a practical matter, that means every retail ISP using BT’s wholesale network is limited to the speeds and features available to every retail service provider using the network.

Talk Talk, which is building (in some instances) its own fiber to home access connections, offers service at 900 Mbps. Though not yet a widespread option, operating its own facilities allows Talk Talk to vastly outperform the typical U.K. access connection.

Though Virgin Media is upgrading, “average” speeds for most fiber-to-home connections runs about 42 Mbps, or 54 Mbps for cable connections.

source: Ofcom

A major disadvantage obviously is that no retail provider is able to distinguish itself on network features, and each supplier’s cost structure is bounded the cost of leasing the wholesale assets.

Virgin Mobile is able to offer a differentiated service because it runs over its own network, indeed using a different platform (hybrid fiber coax, not fiber to neighborhood or fiber to home).

There always are trade offs in the communications business. For many retail ISPs operating in the fixed networks business, the decision is between lower capex, without control; or high capex, but with ability to differentiate.

Amazon might well deem the ability to operate at lower capex the key value, as Amazon Prime video does not require excessive bandwidth.