Most U.S. Consumers Choose Not to Buy the "Fastest" Available Internet Access Speed

Methodology always matters. “What” one chooses to account and “how” one chooses to count always affect the results. There also is a difference between what providers choose to supply and what consumers choose to buy.

The former can point to gaps in supply, the latter to the nature of demand.

The latest Federal Communications Commission’s latest report on fixed network internet access illustrates the interplay between consumer demand and supply. That is to say, it is easy to mistake “what is available” from “what people buy.”

The FCC report illustrates the services “most people buy,”  and not directly “what people could buy, if they wanted.” Services faster than 300 Mbps, if offered, are not included in the analysis if less than five percent of consumers choose to buy them (where available).

To be sure, what gets bought is in substantial part driven by what suppliers choose to make available, and at what prices, including promotions and other packaging mechanisms that actually obscure the actual “retail price.”

In other words, the FCC study reflects what most people choose to buy, which itself is shaped by the inducements (bundle offers) offered by ISPs. When the offers change, so will the data.

A similar, but different methodological problem applies to estimating the average “price” of internet access. Advertised plans are not necessarily the ones people actually buy.

That is necessary, at least in part, because most consumers buy bundles (two or three services, typically) for a flat monthly fee. By some estimates, in 2015 some 61 percent of U.S. consumers bought a bundle.  So it actually is something of a guess what the actual internet access service “costs.”

In such cases, it is necessary to “impute retail prices” for consumers who buy bundles, since they do not pay a separate retail internet access fee.

Those methodological issues noted, among the clearest conclusions one might draw from the the Federal Communications Commission’s latest report on fixed network internet access, based on 2015 data, is that median U.S. internet access speeds are growing; that consumers are buying faster tiers; and that cable companies have driven most of the speed increases and gained the most accounts in the 100-Mbps and faster ranges.

Conversely, digital subscriber line speeds are stagnant, and gigabit services either had not been significant enough by 2015 to affect the median speeds, or the FCC simply chose not to track them (presumably on the correct assumption they could not yet be among the “most popular” tiers of service, as availability was still too limited in 2015).

The study arguably also indicates that--at least in 2015--the interplay between demand and supply. On the supply side (what consumers are able to buy), the “most popular” services actually purchased by consumers were in the 100-Mbps range.

That is not to say these tiers were the “fastest” speed tiers available, but that these were the tiers most consumers chose to buy. That is a key distinction. Consumers in some markets are able to buy gigabit service from Google Fiber, AT&T or CenturyLink, for example, but it does not appear that many consumers actually do so.

The most popular advertised speed plans purchased by consumers tend to range about 100 Mbps for cable providers. AT&T U-verse plans generally were in the 45 Mbps range in 2015, while DSL speeds (all-copper access)  were quite low, in comparison, and have not changed in several years. Verizon FiOS speeds are generally in the 80-Mbps range.

 

source: FCC  

The study reflects deliberate policy choices by internet service providers, with cable operators choosing to boost speeds the most, and providers of fiber-to-home services already have scale choosing to maintain speeds.

It arguably is the case that most suppliers of DSL services face technology constraints, so the lack of progress on that front is a reflection of decisions not to upgrade either to fiber to neighborhood or fiber to home platforms.

Such choices also are evident for fiber-to-home services. Among participating ISPs, only Frontier and Verizon use fiber as the access technology for a substantial number of their customers, the FCC notes. While the maximum supplied download speed for Frontier’s Fiber product has remained 25 Mbps, the maximum popular download speed included in the FCC survey for Verizon more than doubled from 35 Mbps to 75 Mbps in 2012 and has remained at that speed in subsequent years.

The report shows median internet access speeds of about 39 Mbps, with that increase of 22 percent over the prior year driven almost entirely by cable TV providers, as digital subscriber line accounts have increased little, if at all, and deployment of  new fiber-to-home services was too small to affect the overall results.

The maximum advertised download speed among the most popular service tiers, weighted by the number of panelists in each tier, increased from 72 Mbps in September 2014 to 105 Mbps in September 2015, a growth of 45 percent, the FCC says.

Likewise, the percentage of customers able to buy gigabit connections remains small, and actually cannot be tracked in the report, as the study examined only the “most popular” tiers of service, which top out at 300 Mbps.

source: FCC  

The point is that consumer purchasing behavior, which indicates “most” consumers buying services at lower rates than a gigabit, is partly a matter of supplier investments and packaging (including price points and bundling) as well as consumer demand. Most consumers do not seem to buy the “fastest” tier of service.

Shared Spectrum On Many Levels is Coming

Federated Wireless and Alphabet have demonstrated interoperability between their respective spectrum access systems (SAS). The SAS is the key enabler of shared spectrum allocation at the heart of the Citizens Broadband Radio Service (CBRS).

The 3.5 GHz CBRS is a revolutionary approach to increasing the supply of communications spectrum, protecting the rights of licensed spectrum owners while also enabling use of such spectrum by sub-licensees, or on a best-effort basis in other cases.

The CBRS will mean an additional 150 MHz of spectrum can be made available to new communications users and applications without the costly relocation of existing users to allow shared use by new commercial entities.

In principle, spectrum sharing will make possible a wider use of existing communications spectrum, allowing present licensees priority access, while also allowing secondary licensees access to unused or lightly-used spectrum, as well as supporting unlicensed, best effort access when primary or secondary users do not require use of the assets.

Such dynamic spectrum allocation mechanisms are quite new, as traditional allocation mechanisms were highly static, giving exclusive use to some licensees, whether that spectrum was used, or not, and often specifying what applications could be run, and just as often what platforms could be employed.

As spectrum in the low and mid-bands remains relatively scarce, dynamic allocation will improve the efficiency and intensiveness of use of those assets.

The other new development is sharing of different spectrum assets across licensed and unlicensed boundaries, such as bonding of mobile and Wifi assets.  Significant spectrum sharing of this type is expected to be a key feature

The advent of 5G mobile networks, for example, will feature the use of “bonded spectrum” approaches such as License Assisted Access (LAA) to aggregate across spectrum types, LTE Wi-Fi Aggregation (LWA) to aggregate across technologies, CBRS/License Shared Access (LSA) to share spectrum with incumbents and other deployments, says Qualcomm. In addition, there will be new platforms such as Qualcomm’s “MulteFire” that provide quality-assured services exclusively in unlicensed spectrum.

All of those developments represent a revolutionary approach to spectrum usage, moving away from command-and-control to more-dynamic allocation processes.

Airtel Commits to Big Mobile Banking Effort in India

It still remains to be seen whether mobile banking will be a widespread, or simply a niche business, for mobile operators. In regions where retail banking is well developed, it is likely to be a niche dominated by financial providers. In regions with undeveloped banking infrastructure, mobile banking is going to be more important.

So far, in fact, mobile operator involvement in mobile banking has failed to get traction. That is not th case in other markets, such as regions of Africa where M-Pesa operates. In India, mobile banking is about to get a big boost, as well.

Airtel M-Commerce Services, which presently provides money transfer services in 800 towns in India, has been renamed Airtel Payments Bank, and also now plans to use the Airtel network to deliver banking services from 1.5 million outlets covering 87 percent of India’s population..

Kotak Mahindra Bank also has acquired 19.90 percent stake in Airtel Payments Bank.

Though not every tier-one access provider will inevitably become a supplier of banking services, many, in areas where the retail banking system is undeveloped, will do so. In some cases, that will take the form of remittances and payments. In other cases, a wider range of traditional banking operations will be supported.

In other instances, mobile operators might seek roles in retail payments as well.

source: Merrill Lynch Global Research

Mobile operations in core banking activities are important less for revenue upside than for cost reduction in some countries where banking systems are robustly developed. Cost savings and better customer quality of experience are the drivers in such markets, not “branch bank coverage.”

In fact, it might also be correct to say the shift in virtual banking in developed nations, is from online capabilities to mobile interactions, from retail payments to customer service functions, account balance checking and balance transfers.

source: the financial brand

In 2020, IoT Will Not Be Sufficient to "Move the Needle" for Telecom Suppliers, Globally

With the caveat that suppliers and customers always can be wrong, potential solution providers and customers believe as much as $470 billion will, by about 2020, be generated, with $60 billion in profits. About 40 percent of that revenue will be generated by purchases of devices, perhaps $15 billion by connectivity services, some $20 billion in apps, analytics and hosting services and about $20 billion in system integration and implementation services.

If correct, it is fair to note that the biggest potential changes in service provider business model cannot be driven by IoT services and revenues. In an industry with annual revenues in the nearly $2 trillion range, $15 billion simply is not going to move the needle.

The big changes therefore will come in other existing parts of the business (existing revenue sources and existing cost structures, plus "growth by acquisition").

source: Bain

Are We at "Peak" Internet Access Adoption? In the U.S. Market, That Might be True for Fixed Accounts

“You can lead a horse to water, but you can’t make him drink.” The principle, that making something available and having it used, applies to internet access. Not every household buys a fixed line internet access connection.

Some 83 percent of U.S. residents buy (or use) fixed network internet access service at home, according to Leichtman Research Group.

Consistent with the profile of those not online at home, the most common reason for not getting an Internet service at home is a lack of need (50 percent of non-buyers). Cost is said to be the barrier for 17 percent of non-buyers. Some eight percent say they “cannot” buy service.

About 60 percent of non-buyers say they do not own a personal computer or notebook.

At least eight percent of non-buyers say they use smartphones for access. Other studies suggest that perhaps 13 percent of U.S. residents report they use their smartphones exclusively for internet access. Some 65 percent of the smartphone-only respondents say the smartphone lets them do all they need to online, according to a Pew Internet and American Life Project survey.

The availability of other access options outside the home also is a reason some rely on smartphone-only access. Some 34 percent of smartphone-only users say they go online at a public library. Others (about 40 percent of smartphone-only users) access the internet using facilities at a high school, college or community college.

The point is that there is a difference between supply of access services and demand for those services. Virtually everyone would agree that access should be made available to everyone. But that is a different matter from actual purchase. A significant number of households do not want to buy.

One might even predict that the percentage of homes buying a ‘fixed network” service might actually continue to decrease, as tethering, 5G fixed wireless and Wi-Fi (especially homespot access) becomes widespread.

We might already be at the peak of fixed network internet access adoption. "Peak" cable TV adoption was about 80 percent (satellite competitors, then telcos, and now over the top streaming are taking share). "Peak voice" happened about 2000 or 2001, as mobile substitution took hold. Internet access is likely next to begin receding.

Regulators Should Not, or Can Not, Ignore Long, Slow Decline of the Landline Business

Telecom regulators always face the challenge of balancing policies to promote rapid investment and adequate competition, no easy challenge, but also complicated by industry dynamics that are anything but promising, especially in the fixed network segment. Virtually all observers would say they are in favor of much more investment in broadband internet access facilities, for example.

Over the last decade or so, with the exception of Verizon, relatively less investment has been made by telcos to match cable TV internet access speeds, for several reasons. AT&T and Verizon logically have invested most of their network capital in the mobile side of their businesses, a logical move since mobile drives half to 80 percent of total revenue.

But there are other competing uses of capital, such as acquisitions to grow the revenue base. And make no mistake, acquisitions--rather than organic growth--account for most of the revenue growth achieved by AT&T (about 26 percent of revenue growth between 1996 and 2008), and a substantial percentage of Verizon revenue growth (about 46 percent) between 1996 and 2008, for example.

In other words, those firms have to balance capital for acquisitions, dividends and network investment. It is not easy.

source: Deloitte University Press

As a result, U.S. telcos have vastly lagged U.S. cable operators in upgrading internet access speeds, leading to cable operator dominance of that key product segment.

It might be easy to criticize the firms for ignoring their own long-term interests. But such behavior is rational if managements believe the long term prospect is for slow, steady decline.

The other institutional factor is that fixed network telcos are viewed by investors as dividend payers, not “growth” vehicles, which means telcos must make dividend payments a priority, even if that capital might be deployed into faster internet access networks.

The situation, though difficult, is not necessarily that dire for the a few of the tier-one integrated providers who own both mobile and fixed assets. Verizon made a decision to upgrade much of its access network to fiber-to-home within the past decade, though apparently concluding it did not make business sense, since about 2010. AT&T has made more controlled investments, focusing on fiber-to-neighborhood for most of the past decade, though recently switching to a more-targeted gigabit upgrade plan based on fiber to home platforms.

What comes next will be telling. A range of firms, including Google and Facebook, AT&T and Verizon, now are investigating whether new platforms might provide a better business case, including fixed wireless.

The coming 5G upgrades of the mobility networks will include lots of small cell deployment in denser areas, supporting new opportunities for gigabit upgrades without the full cost of fiber to home. That might be a game-changing development for at least some telcos.

The larger point to be made is that the fixed network business is a very-tough proposition for any telco, but especially for smaller providers without mobile assets. With the exception of growth provided by acquisitions, organic growth in the fixed network segment will be difficult, at best.

Why Content and Access Mergers Still Make Sense

There is good news and bad news in the global tier-one telco business. Between 2009 and 2015, most telcos, perhaps as many as two thirds, experienced revenue growth. The bad news is that up to a third of tier-one telcos saw  negative revenue growth, especially in Europe.

The issue is “why?” that pattern exists. One line of thinking is that continent-specific factors are at work (market fragmentation, heavy regulation, wholesale policies, lack of incentives for investment to create new products). Another line of thinking is that, as a “mature market,” Europe points to inevitable revenue erosion in all legacy services (fixed voice, mobile voice and data), as well as modest returns from relatively-new services such as internet access.

We will know a bit more over the next decade, if revenue growth begins to “go negative” across a broader set of geographies or countries. Asia, which now drives most of the global growth, has one singular advantage: lots of people to convert as customers of new internet access services. That also applies for Africa. Those two continents will be, on the whole, the last to see any revenue pressures from market maturation.

Those trends might help explain why AT&T proposes to buy Time Warner, and 21st Century Fox wants to acquire the remainder of satellite broadcaster Sky that it does not already own, or why Verizon seems determined to establish itself as the default buy for advertisers who want a choice from Google or Facebook venues.

It might also be fair to again ask why firms such as Comcast choose to buy assets such as NBCUniversal.

source: STL Partners

The traditional arguments for blending distribution and content assets in the cable TV business had to do with revenue growth more than synergy within the ecosystem (we used to call this “vertical integration”). In part, the revenue growth would come from scale; in part from the ability to create new products; in part from diversification (the distribution business was mature, both in terms of products and regulations on additional growth).

Ownership of complementary assets arguably is useful, but programming rules prevent a distribution entity from restricting sale of its programming assets to rival distributors, or applying non-standard rates when the distribution entity buys content from the programming entity.

When Comcast bought NBCUniversal, in 2009, it was a revenue growth play. Comcast in 2004 had tried to buy Disney, for the same reasons.

As we near 2017, a newer set of justifications exist. One way of describing Comcast’s transformation from “content distributor” to “content owner,” in substantial part, is the notion that doing so allows Comcast to benefit from at least some of the content it delivers over its distribution networks. In other words, Comcast benefits from the revenues generated by the content assets used by customers of its access networks.

That, in a sense, also underlies Verizon’s attempt to fashion a major role for itself in internet--and especially mobile--advertising. As would other access providers, Verizon gains from customer use of applications enabled by its access operations.

To be sure, diversification of revenue sources is seen as valuable. Access and content or app providers are in distinct industries, so multiple roles provides some protection from sector downturns. Beyond that, the content and apps businesses are growing, while core telecom access products are mature and declining.

To a significant extent, owning both content and access also makes easier the creation of new on-demand products to replace the expected declining linear service revenues. That advantage comes not so much from “exclusivity” as from fewer institutional barriers to innovation. The point is not so much the “exclusive” nature of the on-demand content services, but rather incentives to fashion content assets in that manner, faster. Comcast becomes simultaneously a seller and buyer of such services, creating incentives for cooperation between content and distribution entities.