Why 5G Success Will be Uneven

Some fundamental principles of telco and access provider business strategy in the internet era have been quite constant. As "access" has been separated from "applications," value has shifted towards app providers, and away from access providers.

Revenue has tended to follow value. So access providers have tried to increase the value of their access services, while separately trying to create new roles, on occasion, at the app layer. Success has been mixed, but that is not a failure of the strategy, only of the execution. \

History already shows that application businesses are built on access, so if any participant in the content or apps business wants to supply more value, that tends to involve innovation and participation at the app layer of the business, rather than the lower layers.

That is why, to a greater degree than has been the case in the past, 5G success will be uneven: offering bigger potential financial rewards to the bigger service providers and possibly even some financial distress for smaller operators.

The reason is that smaller operators will be able to monetize access services, while the larger operators might (should) be able to leverage applications and services built on 5G connectivity.

That prediction, in turn, is simply an extrapolation from current trends, where the value generated by applications such as video streaming or mobile apps is disproportionately captured by application providers, instead of telcos, mobile operators or internet service providers.

That trend, in turn, is a reflection of earlier trends which shifted value from carrier voice and messaging to over-the-top alternatives. In other words, we should not expect that, in the 5G era, access providers will supply much of the value of any IoT applications and services, beyond access. This will be particularly true for smaller operators, in smaller markets, who do not have the scale to participate as application providers.

The fears access providers have about “becoming dumb pipes” is well warranted: value increasingly is being created and captured by OTT app providers.

“One of the most important politicians in the EU told me that it looks like 5G will drive tremendous growth in mobile companies' revenue, and he could not understand the complaints from mobile operators around Europe,” said telecom analyst John Strand. “He simply assumes that mobile operators will automatically make money with a new mobile standard, even though that was not the case when they rolled out 3G and 4G.”

To some extent, managerial prowess and ability to foster and leverage innovation might also matter, as the applications and services part of the internet of things, enabled by 5G, will be created--willed into being--not simply harvested. Not every country or region will be equally situated, in that regard.

Keep in mind our history with 3G and 4G, both of which were supposed to unleash waves of innovation leading to valuable new services and revenue streams. That expectation lead to overbidding for spectrum in India and Europe, where operators also overpaid for 3G spectrum.

As it turned out, 3G eventually lead to mobile email and then mobile internet access as new apps that drove revenue, but might have had less upside than expected.

Bidders were more restrained in bidding for 4G spectrum, but the notion remained that a faster network, with lower latency, would drive creation of new apps. Early on, tethering emerged as a new driver of behavior, 4G being a much-more-effective platform for use of mobiles for browsing and app use.  At the moment video entertainment consumption also is joining those earlier apps as hallmarks of 4G as an enabler of new use modes, behaviors and apps.

In a similar way, 5G is seen as enabling a new wave of applications, services, revenues and user behaviors, partly by humans but mostly by machines. The extent to which that happens remains a big question. But it is safe to say that it mostly will be the bigger operators, with bigger internal markets and assets, that will benefit most, because they will be able to participate not only in the “access” demand, but also be owners of the applications and services enabled by the access.

For all of those reasons, the strategy now envisioned by many tier-one access providers--own at least some of the applications and services flowing over the pipe--makes good sense. In addition to providing access services, larger tier-one service providers have the ability to become owners of at least some of the apps and services delivered over any access network.

That might eventually include connected car services and other internet of things apps in other industry verticals (healthcare, home security, media). In other words, the notion that “moving up the stack” is necessary is well founded.

Nothing "Natural" About Monopolies or Duopolies in Telecom

To break even in the long run, the operator’s revenues less avoidable costs must cover its sunk costs. The number of players in the industry will adjust in the long run to ensure this margin is realized.

The general observation is correct. In a capital-intensive industry such as the telecom business, only a relatively small number of firms can invest and still hope to wring a profit out of the venture. As a rule, that number is somewhere between two and three firms.

But market size matters. Larger markets can support more contestants, generally speaking. Markets where suppliers have more differentiation can support more contestants. Conversely, markets where price competition dominates might not support so many contestants. Also, in markets where competitors compete in the same geographies, there tend to be fewer sustainable opportunities.

source: Phoenix Center

If telecom access services no longer are thought of as being a “natural monopoly,” neither is the business capable of supporting many providers on a sustainable basis. Precisely “how many” providers are viable in any single market is the issue. In some markets, regulators believe a minimum of four providers is sustainable.

In other markets, many believe only three mobile providers can survive, plus perhaps some number of fixed network operators. In some markets, the present number of mobile suppliers is as few as two. In some markets, perhaps even two cannot be sustained long term, others would argue.

A research paper produced by four professors suggests that, in the Philippines, it will be hard to create more competition beyond the two providers (Globe and PLDT) that now divide the market, unless a government-funded wholesale network is created.

But they suggest competition is needed. The Philippines prices represent consumer costs at 5.9 percent of gross national income per capita,  compared to the regional average of 1.7 percent.

At least traditionally, “regulation is the main lever by which governments can influence competition in the telecom industry, increasing or decreasing the barriers to entry,” the authors say. Some might argue it will not be that simple, going forward. Market entry can be open, and yet competitors might rationally conclude their is no opportunity.

The availability of a spectrum may be the current largest single barrier to entry, the authors say. And yet, what is necessary is not sufficient. “Economically, telecom requires massive capital requirements implying high barriers to entry,” they say.

That noted, the institutional framework matters quite a lot. “Network infrastructure alone for the newcomer could cost as much as US$2.5 billion,” the professors say. Not even that explains the extent of the problem.

“With a constitutional limit of 40 percent on foreign ownership, this effectively limits the presence of companies that can inject fresh new capital,” the researchers note.

A transparent spectrum allocation process, probably using an auction process,  is better than an administrative approach, say a team of academics looking at the Philippines telecom industry.

Perhaps the biggest conclusion they reach is that market entry by a third competitor is “not viable” under the present circumstances.

Spectrum allocation process is important because the method chosen by the regulator determines the resulting structure of the industry.

The present two-player structure is “fiercely competitive,” the authors say. But they also note that  the “Philippine telecom market is highly concentrated.”

The two major telcos, Globe and PLDT, control almost 100 percent of the market and with a Herfindahl-Hirschman Index (HHI)12 of 5162. To put that figure in perspective, the U.S. Department of Justice considers a market with an HHI of less than 1,500 to be a competitive marketplace, and an HHI of 2,500 or greater to be highly concentrated marketplace. At 5162, the Philippines market is extremely concentrated.

Under such conditions, only a publicly-owned third player can afford a  “last-mile” network, they argue. The perhaps-unstated qualifier is that this arguably is true without bigger changes in regulatory policy, underlying technology or business model that can change the potential business model for any third provider.

Were a third (or additional) providers able to get into business without paying for spectrum; using new access platforms; with strong mandatory wholesale rules and possibly different business models, a third competitor might well be viable.

What can not be done under the present framework does not mean a different framework results in the same constraints on any new competitor entering the market.

source:  Epictetus E. Patalinghug Professor Emeritus University of the Philippines ;Wilfred S. Manuela Jr. Associate Professor Asian Institute of Management ; Regina Manzano-Lizares Assistant Professor University of the Philippines; Jason C. Patalinghug Assistant Professor Southern Connecticut State University

Dish to Build IoT Network

Dish Network is raising $1 billion in a bond sale expected to be used by Dish to build an internet of things network, using NB-LTE. That helps clarify a key part of Dish Network’s wireless strategy, which is to avoid losing rights to its spectrum because it has not made meaningful progress towards building an actual network.

According to Federal Communications Commission rules, Dish has to activate a network with 40 percent signal coverage, using the  700 MHz licenses it purchased in 2008 (a deadline it will miss), or, alternatively,  reach a 70 percent buildout by March 2020. That latter target is what Dish now will have to meet. Similar requirements are in place for other spectrum Dish has rights to use.

By focusing on NB-LTE, Dish can claim it is building a network that does not compete head to head with the LTE networks operated by the other big mobile service providers, as NB-LTE aims to support machine-to-machine devices, not human end users.

Much still remains to be established. Dish has no special competence in M2M services and industries, and no operational experience with mobile services. It likely would need a partner to both build and provide retail services. Beyond that, the market size for M2M services is unproven, if considered the next wave in mobile revenues and Dish’s ability to gain enough market share also is unknown, given competition from several would-be nationwide IoT networks and IoT efforts by the other four major U.S. mobile service providers.

"Connectivity is Not an Asset?"

The challenge of avoiding a low-margin, dumb pipe role in the internet ecosystem remains a key strategic  issue for executives running telecom, internet service provider or mobile services firms, as does the product maturation affecting all legacy telecom services (voice, messaging, internet access, linear video services, legacy business access services).  

In addition, it remains unclear whether mobile data can be monetized on a sustainable basis, whether spectrum rights actually create a sustainable advantage, or whether access “users” actually will remain “customers” forever.

“Connectivity is not an asset,” said Alexey Reznikovich, Veon (VimpelCom) CEO. Few internet service providers, mobile operators or telcos likely agree, in a literal sense, since “access” and “subscriptions” literally are the foundation of the business and the specific role within the communications and internet ecosystems.

So take the Reznikovich statements as slightly hyperbolic warnings to “add value” to the access business. Up to this point, that process of adding new value and revenue sources has worked. Fixed network voice was replaced by mobile voice; then mobile voice augmented by text messaging revenues. Later, maturing mobile voice and texting revenues were supplanted by mobile data services.

But Reznikovich raises a key issue: will mobile data actually drive profit? There are two angles. First, whether mobile data access services are--and can remain--profitable in their own right. The second question is whether service providers can create new roles in mobile apps and services, with value and revenue streams to match.

AT&T Supports 12 Million Connected Vehicles

AT&T says it supports more than 12 million vehicles with connectivity services, growing about a million new connections each quarter, working with at least 22 global brands. "Automakers are wanting to be able to get updates off a car and be able to update the car over the air similar to what we do with smartphones,” said Chris Penrose, AT&T SVP.  Safety, security, remote access and location-based services also are sought.

5G Not a Guaranteed "Winner" For All Mobile Operators

To a greater degree than has been the case in the past, 5G success will be uneven: offering bigger potential financial rewards to the bigger service providers and possibly even some financial distress for smaller operators.

The reason is that smaller operators will be able to monetize access services, while the larger operators might (should) be able to leverage applications and services built on 5G connectivity. The analogy is video entertainment services, which have proven a positive revenue source for the biggest operators, while being a money-lower for most small providers.

“One of the most important politicians in the EU told me that it looks like 5G will drive tremendous growth in mobile companies' revenue, and he could not understand the complaints from mobile operators around Europe,” said telecom analyst John Strand. “He simply assumes that mobile operators will automatically make money with a new mobile standard, even though that was not the case when they rolled out 3G and 4G.”

To some extent, managerial prowess and ability to foster and leverage innovation might also matter, as the applications and services part of the internet of things, enabled by 5G, will be created--willed into being--not simply harvested. Not every country or region will be equally situated, in that regard.

Keep in mind our history with 3G and 4G, both of which were supposed to unleash waves of innovation leading to valuable new services and revenue streams. That expectation lead to overbidding for spectrum in India and Europe, where operators also overpaid for 3G spectrum.

As it turned out, 3G eventually lead to mobile email and then mobile internet access as new apps that drove revenue, but might have had less upside than expected.

Bidders were more restrained in bidding for 4G spectrum, but the notion remained that a faster network, with lower latency, would drive creation of new apps. Early on, tethering emerged as a new driver of behavior, 4G being a much-more-effective platform for use of mobiles for browsing and app use.  At the moment video entertainment consumption also is joining those earlier apps as hallmarks of 4G as an enabler of new use modes, behaviors and apps.

In a similar way, 5G is seen as enabling a new wave of applications, services, revenues and user behaviors, partly by humans but mostly by machines. The extent to which that happens remains a big question. But it is safe to say that it mostly will be the bigger operators, with bigger internal markets and assets, that will benefit most, because they will be able to participate not only in the “access” demand, but also be owners of the applications and services enabled by the access.

Where Will Telcos Find Roles in Connected, Autonomous Vehicle Ecosystem?

What are the opportunities for telecom companies in the new mobility ecosystem based on connected and autonomous vehicles? Much could hinge on how successful access providers are in creating new roles in the applications and services portions of the ecosystem (either by organic growth or, or more likely, acquisition).

Almost nothing is certain about internet of things, much less the roles internet access providers will play in the ecosystem. That some amount--perhaps a significant amount--of incremental access revenue will result is a given.

In connected cars, passengers will likely continue to rely on mobile connections or car entertainment systems (or both) to stream content and access information. But the bigger opportunity lies in owning the infotainment and navigation services, which could reach about $40 billion in revenue globally in 2020.

Some are optimistic, arguing that telecom companies are well positioned--beyond connectivity--to leverage billing, payments, analytics for planning and optimization, and asset management services. Of course, we have heard that argument many times before, and not so much has actually happened.

Fleet management services, including automated fleet scheduling, dispatching, and tracking as well as assisting in managing the rapid anticipated growth of autonomous fleets, also is seen as an area communications providers might supply.

If that seems unlikely, consider the way other access suppliers (such as cable TV companies) now own content assets and the networks to deliver content; own telematics services or home security operations.

Much could hinge on the way new IoT systems develop. In the autonomous vehicles space, for example, it might make a great deal of difference whether core functions are self-contained in each vehicle or rely on vehicle-to-vehicle and vehicle-to-infrastructure communications. That could affect the size of the communications services opportunity.

Deloitte’s analysis has found that the breadth of future mobility use cases requiring connectivity is expected to generate data traffic of roughly 0.6 exabytes every month by 2020—about nine percent of total US wireless data traffic.

Deloitte also estimates that data traffic associated with mobility and transportation could grow to 9.4 exabytes every month by 2030.

But leaders at the biggest tier-one providers might also hope to assume additional roles in the content and applications portions of the ecosystem.

source: Deloitte University Press