Connected Car Now a Material Revenue Contributor for AT&T and Verizon

The connected car business now is a material factor for AT&T and Verizon, with AT&T selling billions of accounts and Verizon booking more than $1 billion in annual revenue.

In some quarters, AT&T has been adding nearly a million net new connected car accounts, illustrating one of three potential revenue streams from the connected car business. In 2016, AT&T added more new connected car accounts than phone or tablet accounts.

source: Chetan Sharma

source: AT&T

Aside from supplying the mobile connections, AT&T also hopes to sell data and marketing information to car makers, including location and usage information useful for fleet operators.

Also, temporary prepaid internet access accounts also are viewed as an opportunity for rental car fleets or other scenarios where the driver wants to enable internet access for a vehicle on a temporary basis.

source: S and P Global Intelligence

source: S and P Global Intelligence

T-Mobile US Launches IoT Plans

T-Mobile US launched two new low-cost Internet of Things (IoT) connection plans, including the access module. For applications that use a little data, customers can get up to 5MB of data per month for $20 per year per device in the first year and $6 per year per device afterwards.

For unlimited data at 64kbps, connections cost $25 per year per device. For a limited time, these customers get $5 off the first year for each device, T-Mobile US says.

With both T-Mobile IoT Access packs, T-Mobile will cover the cost of a Sequans Cat1 module, up to $16 per module.

Verizon and AT&T likewise have created service plans for unmanned aerial vehicle communications. AT&T’s “Machine Type Communication”  prepaid plans, which target developers and businesses, include three tiers of data and text messages: 1 gigabyte of data valid for up to 1 year and 500 text messages for $25; 3 GB of data valid for up to 1 year and 1,000 text messages for $60; and 5 GB of data valid for up to 2 years and 1,500 text messages for $100.

As always is the case, pricing will be an issue as mobile operators and IoT specialists try to grab leadership in the IoT connections business. In some cases, narrowband IoT networks offer connections about an order of magnitude lower than mobile rates.

Gigabit or 100 Mbps? Largest U.S. ISPs Make Different Choices

Why is Comcast, the largest U.S. internet service provider, pushing to make gigabit service available to all its customers, while Charter Communications, the second-largest ISP, only will sell 100 Mbps?

In each case, the decisions reflect strategic choices about what is required in their markets. Charter, the second-largest ISP, takes a minimalist approach at least in part because many of its systems are in rural areas where 100 Mbps is a top-of-the line service. Comcast, on the other hand, operates mostly in big-city markets where competition from other gigabit providers can be expected.  

That does not mean those suppliers actually expect most consumers to buy their fastest service. In fact, they probably expect that most consumers will not do so. But those expectations also drive thinking about how much investment, and what type of investment, to make it their current generation access platforms.

That is true in other markets, as well.

In the United Kingdom, direct fiber connections on at least one access link remain a small fraction of total internet access connections is about two percent, according to U.K. government estimates. All-copper digital subscriber lines account for 44 percent or so of total connections; fiber-to-curb about 34 percent; and cable TV connections about 21 percent of total.

Speeds of Broadband Technologies as seen in December 2016 (ordered by median speed)
Provider	Ratio of tests	Down Speed of bottom 10% Mbps	Median Mbps	Mean Mbps	Median Upload Mbps	Mean Upload Mbps	Down Speed of top 10% Mbps
FTTH/FTTP	1%	16.7	49.1	72.6	16.3	32	160.1
Cable	20.6%	8.9	43.4	52.4	5.4	6.4	104.9
VDSL2/FTTC	33.9%	13.3	30.1	31.8	7.1	7.6	51.9
Mobile	N/A (*)	2.3	14.5	21.3	3.1	4.4	46
Fixed Wireless	0.14%	3.1	14.3	27.8 (**)	2.1	14.2 (**)	55.4
Satellite	0.04%	1.6	12.2	12.9	0.1	0.3	25.3
ADSL/ADSL2+	44.3%	1.1	5.5	6.8	0.6	0.6	14.8
(*) Mobile was not included in the proportion of tests as the assumption is the majority of the tests are people who have a fixed line option too. (**) We advise caution on these two wireless mean speeds, as they appear skewed to due a small number of tests that are symmetric and in the 200 to 300 Mbps region, this may be people testing connected via Ethernet to a mast or as one or two fixed wireless providers suggest they provide Fibre to the Premises in a small part of their footprint.

source: Thinkbroadband

In the United States, cable TV companies lead, in terms of speeds, for most consumers, even if independent providers and telcos support fiber-to-home networks. In the third quarter of 2016, cable operators had 63 percent of the installed base of fixed internet connections, and have added virtually all the net new accounts (more than 100 share of new accounts), as they  have been for a few years.

That means that cable access platforms will use hybrid fiber coax (fiber plus copper), even if others (AT&T, Google Fiber, independent ISPs) deploy fiber to home networks. Cable operators use HFC because they can: gigabit speeds are possible on the standard hybrid networks. Telcos and independent ISPs must opt for FTTH to supply gigabit speeds.

Over the next couple of years, all of Comcast’s customers (Comcast is the largest U.S. ISP) will be able to buy gigabit service, and many of the other leading cable operators will be making that same move. For the moment, Charter Communications, the second biggest ISP, will hold top speeds to about 100 Mbps, across all its territories, though some customers (former Time Warner Cable customers) might be able to buy 300 Mbps.

In rural areas, fiber to home might not always be possible, but cable hybrid fiber coax networks might. That is important because the industry-standard DOCSIS 3.1 platform supports gigabit service on standard HFC cable networks.

The point is that decisions about “speed” vary, even between the largest and number-two U.S. ISPs. So do decisions about “minimum viable” access platforms.

Why 5G Will Have to Be Different

There are 5G skeptics who argue ISPs cannot afford it, or that other elements of the business model are questionable, mostly built around economies of scope and scale that might not develop, and certainly not by the 2020 time frame touted by backers in Korea, Japan and the United States. And some simply question whether most consumers actually will want to pay for it, much less need it.

Reliance on new millimeter wave spectrum also causes some concern, as signal propagation will be an issue. Use of small cells will require significantly-new backhaul infrastructure as well, while frequency-agile handsets might be pricey.

But there is one area where supporters and skeptics do agree, and that is that if and when 5G emerges as a sustainable platform, it will be because big new revenue streams and applications have emerged, as well. Virtually all agree that will, or could happen, because of the internet of things and machine-to-machine applications.

In other words, should 5G prove sustainable, it will be because new and vital enterprise apps have developed, although new fixed wireless services in the consumer segment might prove to be quite helpful, for the business case.

There are clear signs that such new thinking already is driving capital investment decisions. Consider the way Verizon is deploying new optical fiber in Boston. In the past, FiOS has either an “either, or” proposition: either full residential deployment or not.

Now, Verizon architects seem to have shifted to a network that uses dense fiber trunks suitable for supporting macro and small cells, and then extends the distribution network from there. In some ways, that One Fiber network is a mirror image of the network cable operators want to deploy to support their eventual W--Fi-first mobile networks.

Some leading cable operators, with a heritage serving the consumer segment, are building dense public Wi-Fi networks on the back of their consumer internet access services, essentially trying to create an enterprise service on the backs of a consumer service.

Verizon is taking the other tack, essentially building an enterprise network (macro and small cell backhaul) that helps create a new IoT capability, and that in turn lowers the cost of creating a  consumer capability (fiber to the home). It already is clear that tier-one service provider fixed network revenues are driven by the enterprise segment, not consumers.

Many would argue that the XO Communications acquisition is part of that overall direction, as XO contributes a fiber-rich enterprise customer network. And, as always is the case, having direct fiber access to any anchor tenant lowers the cost of reaching the next set of customers.

Somewhat ironically, “lots more fiber” to support enterprise apps and IoT makes high-bandwidth services for consumers more feasible. But the new framework is “bandwidth to the customer,” not always “fiber to the customer.” One Fiber definitely is “fiber to the tower” or “fiber to the cell site.” I

In many cases One Fiber might also mean “fiber to the business.” Once that is done, the economics of supplying gigabit to the small business or residential customer are a lot easier. In some cases that might mean full fiber-to-home deployment. In other cases, fixed wireless might be the solution.

The point is that the legitimate concerns about the 5G business model are related to enterprise services, enterprise networks and fiber deployment strategy in a way that has not been true for earlier mobile network generations. In that sense, and others, 5G is different.

Why Both 100-Mbps and Gigabit "Top Speeds" Make Sense

Decisions about internet access speeds always are a mix of supply and demand drivers, as suppliers invest in capabilities they believe potential customers will buy, at specific price points, at levels that are sustainable long term.

That is why the second-largest U.S. internet service provider--Charter Communications--sells 100 Mbps connections as its top offer, while Comcast and other cable companies are rolling out gigabit connections.

Charter could upgrade to a gigabit, but clearly believes the market will pay for 100 Mbps. If so, then investing in more-expensive gigabit connections does not make business sense.

Comcast and others (AT&T, many independent ISPs and other cable companies) think upgrades to a gigabit are required for competitive reasons (headline speeds and marketing), even if they believe most consumers will not choose to buy such services.

The key observation is that nobody actually has found that most consumers are willing to buy gigabit connections when they also have a choice of 100-Mbps up to 300-Mbps choices that cost less.

In other words, investing in gigabit platforms almost always--so far--involves a determination that most consumers will not buy that product, and instead will opt for a lower-speed--though still fast--connection.

So why supply gigabit services? The answer is because “our competitors do so.”

Comcast primarily operates in major urban markets, where competition is more robust, and where it faces Google Fiber offering gigabit services. That is true for AT&T and CenturyLink as well. Even if only 10 percent of customers actually choose to pay for gigabit services, that still sets market expectations, and no leader wants to face the marketing claim that “it is not the leader” in speeds.

Customer demographics also can play a role. Charter historically has operated in smaller markets, where competition is less robust, though the new Time Warner Cable assets primarily are in larger urban areas.

Comcast, on the other hand, mostly operates big-city networks, where it faces competition from other ISPs presently, or soon, to offer gigabit speeds.

So gigabit headline speeds matter, in big markets, even if suppliers realize most consumers will not buy them, yet. Google Fiber, and some other gigabit providers, also have found demand for gigabit connections less robust than they had hoped. EPB reports that about eight percent of its internet access customers buy the gigabit service, for example. Google Fiber might have wound up getting 10 percent or less take rates for its gigabit service, priced at $70 a month.

Under such conditions, a range of decisions, ranging from “top speeds of 100 Mbps” to “top speeds of a gigabit” or even 2 Gbps, make business sense. Demand matters when supply is considered.

Cable Operators Largely Drive U.S. Fixed Network Speed Increases

Competition in U.S. internet access markets, despite some concerns, seems to have spurred some of the most-aggressive speed upgrades ever. According to Ookla, U.S. fixed network access speeds have averaged more than 50 Mbps for the first time, ever.

Between 2015 and 2016, fixed network internet access speeds grew more than 40 percent.

One might be tempted to argue that it is gigabit access offers from Google Fiber, AT&T or Comcast and other cable operators that are driving the speed upgrades. That is unlikely. There simply are not enough actual gigabit customers to affect national trends. Where gigabit and other speeds are sold, it seems unlikely that more than single digits worth of customers actually buy.

Instead, the key shift is upgrades by cable operators, particularly upgrades into the hundred-megabit range.

source: Ookla

Mobile speeds also have grown by more than 30 percent since 2015 with an average download speed of 19.27 Mbps in the first six months of 2016.

Overbuilder Model Remains Challenging

Though many have high hopes for the role of municipal or other types of public-private internet access ventures, competing as the third provider in an access market where cable companies and telcos already operate has always been a tough proposition.

Google Fiber is the latest, but hardly the only example. Overbuilders--as fixed network access providers competing against the incumbents are known--always have had a hard time sustaining their businesses because market share is so hard to wrest from the incumbents, despite episodic waves of enthusiasm for overbuilder business models of various types.

Though many think that is because of nefarious behavior on the part of incumbents, the big problem is simply the dynamics of market share in a three-provider fixed network market. Even assuming equal levels of skill and commitment, it has been very difficult for “number three” providers to wrest more than 20 percent share in any market.

That, in turn, “strands” a great deal (80 percent, potentially) of the network assets, and dramatically raises the “cost per customer.” For some key services, such as video entertainment, matters are even worse, as the competition also includes Dish Network and DirecTV (owned by AT&T), which further reduces the likelihood that any overbuilder offering video is going to get significant share.

Some believe Google Fiber, for example, got 10 percent or less of its Google Fiber internet access customers to buy its video service. If Google Fiber in some instances got 10 percent internet access market share, that implies video share of about one percent. And that is not sustainable.

And though some believe Google Fiber might be sold, that does not exactly square with the investment Google Capital recently made to acquire a stake in RCN and Grande Communications, two overbuilders that are being acquired by TPG, a private-equity firm. It would seem incongruous--if Alphabet really wanted to rid itself of Google Fiber--to simultaneously invest in other overbuild assets.

A decade and a half ago, a wave of overbuilders sprung up, with a fairly-standard argument about sustainability. By offering superior triple-play packages, overbuilders would be able to get 15 percent to 20 percent market share, eventually. At the top end of that range, and three anchor products to sell, the logic was sound.

Few have actually managed to hit that 20-percent market share level, though. Arguably, the few that have done so operate in markets where there are not, in fact, two strong incumbents (telco and cable). EPB in Chattanooga, Tenn., for example, is the poster child for overbuilder hopes, having gotten as much as 45 percent of consumer market share in its service area (with share defined as revenue-generating units, not “accounts” or “homes”).

EPB’s internet access share might be about 27 percent, its video share lower than that. An interesting statistic, in that regard, is that about eight percent of EPB’s internet access customers buy the gigabit service.

EPB’s market share is highly unusual in most overbuilder markets, as EPB arguably competes with Comcast, not AT&T, which has negligible video share in Chattanooga.

In a triple-play market, that is important. Comcast might have 61 percent video share, while EPB might have 36 percent share, leaving only three percent video share held by AT&T. Essentially, EPB has become the number-two provider, relegating AT&T to third place, something that is not the case in most other U.S. markets where three mass market fixed network suppliers compete.

The point is that the economics of overbuilding have been difficult for decades, which is why so few are attempted and why so few succeed.

As Google Fiber’s experience indicates, the overbuilder business model remains challenging, unless one of the incumbents essentially chooses not to fight.