Will Tier-One Business Model Ever Work in Rural Areas?

Access networks are expensive; rural access networks more so, which explains why human beings so often complain about the quality of their communication services And with the qualification that there always are tensions within any business ecosystem between rival providers and roles, a wider range of options now are conceivable.

To use one example, tier one service provider business models and networks might not be the best way to provider internet access and mobile communications in many rural areas around the world.

Even some tier one organizations behave in ways that illustrate the truth of the statement. Verizon, for example, has been selling off its rural properties, and focusing on its urban networks. Former rural telcos including CenturyLink, Windstream and Frontier Communications have become firms deriving most of their revenues and actual profits from business customers, not consumers at all.

Mobile networks everywhere earn most of their revenue, and virtually all their profits, from a fraction of total cell sites in urban areas.

So many have a bottoms-up solution: stop trying to cram unworkable business models down and out, when only lower-cost “bottoms up” approaches make sense. That does not mean there is no role for tier-one providers, only that  local access is not the optimal role in many rural and isolated locations.

Perhaps matters are more contentious for communities of larger size, where conflict over the propriety of municipal broadband always is heated. There arguably is much less room for debate where it comes to isolated and rural areas. In such areas the tier-one business model might not actually work.

It might well make more sense to use a local, bottoms up approach where a village or cooperative actually operates access facilities, in cooperation with other entities that provide backhaul and transport, and perhaps other services.

Time and again, in the effort to provide communications (internet and other services) to everyone, we keep returning to a core problem: the business model often does not work. Historically, the model breaks because networks cost too much and people cannot afford to buy services.

There are, of course, other issues ranging from technological proficiency to language and literacy, lack of backhaul or electrical power, plus other compelling problems such as sanitation and clean water access.

But the problems within some level of supplier control are retail cost of service, beginning with the cost to create the access networks.

A recent example is the estimate by Europe’s tier-one service provider organization ETNO that it will cost €660 billion to create ubiquitous gigabit internet access networks using fiber to the home, and might take as long as 30 years to achieve, at current rates of investment.

In many other regions and markets, the feasibility of any fixed network solution is questionable. One reason people now have voice and text communications is because suppliers largely shifted to mobile networks.

A key sensitivity even in the ETNO forecast is the assumption that fiber to the home is the platform. Increasingly, that is too narrow a view. In a few markets, it is entirely rational to argue that hybrid fiber cable TV networks can supply gigabit levels of speed for internet access on a timetable and at a retail cost fiber to home networks cannot match.

In a growing range of scenarios, urban, suburban and rural, it is becoming rational to think fixed wireless access will succeed where fixed networks or standard mobile networks cannot. Also, in rural and isolated areas, even more novel approaches might be necessary, such as village-level networks owned or operated by the community, or joint ventures between villages and tier-one service providers and transport providers.

Also, huge new efforts are being made to create and deploy new technology that should help change business models. Open source telecom technology is one approach. The CORD Project and Telecom Infra Project provide examples.

Allowing use of huge amounts of new spectrum is another way technologists and policymakers are working to eliminate scarcity. The U.S. Federal Communications Commission, for example, is getting ready to release 39 GHz of new communications spectrum, including between 7 Ghz and 14 GHz of unlicensed spectrum.

The only issue is real-world deployment, as signals in the millimeter wave region have propagation issues, compared to radio signals below 1 GHz, for example.

In a recent test, millimeter wave signals at 73 GHz traveled more than 10 kilometers in a rural setting, even when a hill or knot of trees was blocking their most direct route to the receiver, using radios drawing less than one watt of power.

Keep in mind that, until recently, frequencies in such ranges could not be deployed commercially, as signal propagation was too limited. But advances in Moore’s Law mean we can use sophisticated signal processing to create much-better radios, receivers and modulation techniques, allowing us to commercially use such millimeter wave frequencies for the first time.

The good news is that, on many fronts, developers are working to essentially break free of the cost constraints that limit access networks from commercial deployment on a wide scale.

Is Fiber to Home Feasible in EU Within 20 Years?

ETNO, the Association representing Europe’s leading providers of digital communications and services estimates it will cost €660 billion to create ubiquitous gigabit internet access networks using fiber to the home, and might take as long as 30 years to achieve, at current rates of investment.

Those sums include €360 billion to enable FTTH broadband for all European households, €200 billion in 5G radio access networks as well as €100 billion for low-latency proximity data centers.

You can draw your own conclusions about whether that is feasible.

To illustrate how much has changed in terms of access policy, consider that it was in 2010 that the European Community set a goal of 30 Mbps internet access across the region. By 2016, the EC announced a new goal of access at more than 100 Mbps by 2025, with gigabit access for key enterprises, schools, other important public institutions.

One key problem is declining returns for investment in telecom infrastructure,  the Boston Consulting Group study suggests. Over the last five years, return has dropped from 15 percent to 10 percent, for example.

The other problem is that revenue per account in Europe has not risen as speeds have grown between 2012 and 2015. Triple-play package prices, for example, declined 25 percent over that same period.

That problem also is being seen in Australia, where the percentage of customers willing to pay more to get 100 Mbps service in place of 25 Mbps service. Only about 14 percent of consumers are willing to pay the premium to upgrade to 100 Mbps services, for example.

Windstream Acquisition of EarthLink Fits

Windstream’s proposed acquisition of EarthLink is supposed to unlock about $125 million in annual synergies, including an additional $990 million of revenue. The deal also illustrates the importance of enterprise and mid-market customers in the core telecom market for service providers unable to grasp other opportunities.

Smaller service providers often do not have the options tier-one providers have available to them to diversify into new lines of business as older revenue sources decay.

CenturyLink, for example, does not own mobile assets. Neither do Windstream, Frontier Communications. None of those firms have the scale to move into content creation or mobile advertising, Internet of Things apps and connected cars.  

Still, there are some options. Not all segments of the core telecom market have the same revenue per account or margin per account profiles. Rural accounts generally come with lower average revenue per account than urban accounts; consumer accounts produce less revenue than business accounts.

So CenturyLink and Windstream and Frontier Communications have followed similar strategies. All originally were rural service providers and all three have pushed to become providers of services sold to business customers.

The former rural carriers have taken a path that is open to them, namely shifting the center of gravity of their operations from lower-revenue-per-account consumers to more-lucrative business customers.

If the CenturyLink purchase of Level 3 Communications clears, CenturyLink will earn 88 percent of revenues from business customer services.

Since about 2010, both Windstream and Frontier have earned most of their money in the business segment, despite the continuing preponderance of consumer accounts.

In its second quarter of 2015, Windstream had revenues of $1.4 billion. Consumer revenues  represented just $314 million--about 22 percent--of total revenues.

Frontier Communications total revenue of about $1.4 billion as well, with consumer revenue of about Total residential revenue was stable at $615 million for the second quarter of 2015, while total business revenue was $621 million. So a bit more than half of revenue was generated by business customers.

source: Windstream

Without Zero Rating, Video Service Models Will Not Work

Though zero rating has been viewed through a “network neutrality” lens, it also, and equally, is a matter of content business models. To outlaw zero rating is to outlaw many content businesses as well.

For that reason, and ultimately, zero rating will have to be deemed lawful for content businesses that use the internet. That is why all four U.S. mobile service providers are moving to some form of zero rating for video consumption.

Historically, most media and content businesses have relied on zero rating. Cable TV subscribers buy content, and use the access network--without extra charge--simply as the delivery mechanism. Over the air TV and radio use the same model, as do satellite content providers. Streaming video services operate the same way.

Even print content subscriptions do not charge separately for “delivery” of magazines, newspapers or other content.

As the internet now has become the delivery mechanism for video and other content, business models and regulatory frameworks for managed content services will have to be allowed, or the media business model will not work.

The reasons for the change are simple enough. The consumer content business actually does not work if a content subscription also includes charges for use of the network.

Video is the most bandwidth-intensive application typically used by consumers, by an order of magnitude or more. In other words, consumption of one minute of video consumes more bandwidth than one minute of web browsing, and up to a few orders of magnitude more data than one minute of texting, voice or messaging.

Revenue per bit metrics likewise are skewed. By some estimates, where voice might earn 35 cents per megabyte , revenue per Internet app might generate a few cents per megabyte. It gets worse. Mobile operators earn nothing when customers watch over the top services such as Netflix, beyond the typical bigger data buckets such behavior will drive.

Forecasts that the typical smartphone user will require 4.4 GB per month of data completely fall apart if significant video consumption is factored into the model. Between 2016 and 2019 alone, video data consumption could increase by an order of magnitude.

A single viewed two-hour movie might consume 480 MB, a high-definition movie consumes perhaps 850 MB. As mobile video consumption becomes a major activity, it is not hard to predict the impact on networks and data consumption if a typical viewer watches only eight items a month of movie content, consuming between 4 GB and 7 GB per month.

And that might well prove to be an understated amount of consumption. Mobile video consumption might already have surpassed desktop video by the end of 2016.

source: IAB, GfK

source: Cisco

source: Cisco  

Why SingTel, Axiata, AT&T, NTT and Verizon are Making Investments Outside Their Core

There is an exceedingly good reason why firms such SingTel, Axiata, AT&T, NTT and Verizon are undertaking growth initiatives many consider risky, such as moving into digital content and advertising.

With the voice model maturing, some markets still are pinning hopes for growth on data revenues. But what is to be done in markets where data adoption already is nearing saturation? That is the reason tier-one service providers are investing in lines of business "outside" their traditional "access revenues" core.

Communications service revenue is a mix of price per unit and volume, which is to say, a function of supply and demand. Up to a point, suppliers can compensate for increased supply, which lowers prices, by increasing sales volume.

If supply continues to increase,  that strategy fails, though. And some might argue that the drivers of supply increase are numerous. New competitors, new spectrum and new technology are expanding supply.

Demand is increasing, as well. But that demand also comes with price sensitivity. Consumers cannot pay “any amount” for communications services. So even if demand growth is exponential, revenue growth tends to be linear.

Source: JP Morgan

Source: JP Morgan

source: Cisco

In 2011, researchers at Analysys Mason provided this estimate of future mobile revenue per gigabyte, a basic trend hard to refute.

source: Analysys Mason

A separate 2011 forecast by Strategy Analytics suggested the same trend would develop. Analysts at McKinsey likewise have pointed out that service providers need to radically reduce costs for data access.

All those trends make clear why mobile and fixed service providers are vigorously looking for big new revenue sources. Volume increases are not going to compensate for price per unit drops, forever.

The telecommunications business is harder than it used to be, but not only because competition now is the rule. The emergence of the Internet means the access and transport functions are only a part of a bigger ecosystem.

As consultants at PwC point out, telcos and access providers operate in the “network” part of the full value chain. But most of the value will come elsewhere, from services and apps able to provide the intelligence and control for processes that modify real-world activities.

That is why moving up the value chain is so important, and why many access providers are investing in Internet of Things, machine-to-machine communications and industrial Internet, if rather cautiously.

Is CenturyLink Acquisition of Level 3 a Mistake, or Sound Strategy?

There is no shortage of critics of AT&T’s bid to buy Time Warner, no shortage of those who also think CenturyLink’s effort to buy Level 3 Communications is a mistake. Many in the policy community likewise considered the Comcast acquisition of Time Warner, the AT&T acquisition of T-Mobile US and the merger of Sprint with T-Mobile US profound mistakes.

One might even find a few who think, well after the Comcast acquisition of NBCUniversal, that deal was a mistake.

Perhaps even some who doubt Windstream’s acquisition of EarthLink will make much sense. Windstream reportedly is in talks to buy EarthLInk. Windstream, based in Little Rock, Arkansas, had a market capitalization of about $653 million, while Atlanta-based EarthLink was valued at about $572 million.

To be sure, there are antitrust concerns at the heart of many of the proposed acquisitions. But even when antitrust is not a key issue, many believe some of the proposed deals are unwise.

Lack of synergy, lack of value creation or execution risk are common complaints. CenturyLink plus Level 3 Communications only makes a bigger company losing money, some argue. AT&T does not need to own Time Warner to reap the benefits of content acquisition, others argue.

Execution risk is an issue; always is. But an argument can be made that accepting even moderately-high levels of risk is a necessity for all tier-one service providers, for structural reasons.

In monopoly days, service providers owned 100 percent of the applications they sold. In the internet era, service providers own some of the apps customers use. Strategy in the internet era is to capture at least some of the value of the applications business, as total ecosystem revenue is moving to apps, and away from access.

And that is the key to understanding some of the mega-mergers. Smaller service providers often do not have the options tier-one providers have available to them. CenturyLink, for example, does not own mobile assets. Neither does Windstream.

Also, both CenturyLink and Windstream, plus Frontier Communications have followed similar strategies. All originally were rural service providers and all three have pushed to become providers of services sold to business customers. None arguably have the scale to become major players in digital advertising, mobile advertising or mobile content.

With that option off the table, the former rural carriers have taken a path that is open to them, namely shifting the center of gravity of their operations from lower-revenue-per-account consumers to more-lucrative business customers.

If the transaction clears, CenturyLink will earn 88 percent of revenues from business customer services.

Since about 2010, both Windstream and Frontier have earned most of their money in the business segment, despite the continuing preponderance of consumer accounts.

In its second quarter of 2015, Windstream had revenues of $1.4 billion. Consumer revenues  represented just $314 million--about 22 percent--of total revenues.

Frontier Communications total revenue of about $1.4 billion as well, with consumer revenue of about Total residential revenue was stable at $615 million for the second quarter of 2015, while total business revenue was $621 million. So a bit more than half of revenue was generated by business customers.

You might argue that moving into brand new lines of business is better, if it can be done. But where it cannot be done, then shifting operations to higher-revenue customers makes sense, where it can be done.

The telecommunications business is harder than it used to be, but not only because competition now is the rule. The emergence of the Internet means the access and transport functions are only a part of a bigger ecosystem.

As consultants at PwC point out, telcos and access providers operate in the “network” part of the full value chain. But most of the value will come elsewhere, from services and apps able to provide the intelligence and control for processes that modify real-world activities.

That is why moving up the value chain is so important, and why many access providers are investing in Internet of Things, machine-to-machine communications and industrial Internet, if rather cautiously.

Charter Confirms it Will Get into Mobile Business

In case you had any remaining, doubts, both Comcast and Charter Communications--firms that control 75 percent of all U.S. internet access subscriptions faster than 25 Mbps and 82.5 percent of all U.S. cable customers--are going to be in the U.S. mobile services business.

“Charter intends to leverage and expand its existing Wi-Fi service, work with MVNO partners, and, at the appropriate time, invest in its own licensed spectrum based wireless network,” the company says in a filing with the Federal Communications Commission.

You can draw your own conclusions about what that ultimately will mean for the structure of the U.S. market.

But it is at least plausible that Sprint and T-Mobile US cease to exist as independent entities, and that all four of the largest U.S. mobile providers are parts of “fixed plus mobile” firms that sell the full range of video, voice and data services to consumers and businesses.

That could develop if--and some would say “when”--Comcast and then Charter move to acquire one of the two “mobile only” providers at the top of the U.S. mobile market. As has been the case in other parts of the communications market, the leading cable companies will challenge the legacy telcos--AT&T and Verizon--for market share.

Should that happen, there will no longer be any question about whether “mobile only” works as a fundamental strategy for the tier-one providers. At the point where all four tier-one providers operate both mobile and fixed networks, the “mobile-only” strategy will be reserved for smaller specialists.

As has become the case for telcos that have non-overlapping fixed network footprints, Comcast and Charter also will, for the first time, compete against each other in the mobile realm.

Mobile will foundational for cable operators looking for revenue growth. For starters, it is a big business where they can take market share, as they have done in voice, internet access and business services.

With respect to enterprise services, one only has to note the shift of enterprise traffic from fixed to wireless networks (mobile, Wi-Fi and probably fixed wireless), to understand the attraction of owning mobile assets.

Traditional “fixed network” traffic might represent as little as three percent of volume by 2025, Bell Labs believes. For nearly any major service provider serving enterprises, inability to sell mobile services at retail misses much of the market opportunity.

source: Future X Network