Will Half of All IoT Revenue be Earned by App Providers?

One way to try and understand potential roles for ecosystem participants in the internet of things (IoT) area is to use analogies to existing businesses. The value chain from chips to end user applications in the internet content business can provide one example. The roles within the internet media business can provide another example.

The same thing can be gleaned from looking at the business customer ecosystem for IoT. In all cases, the customer (buyer or user) is at one end of the value chain, while chips are at the other end. That roughly corresponds to the layered open systems interconnect model, which has applications at layer seven, and cables and media at the physical  layer (layer one).

In the consumer internet content business, you can think of the actual businesses and revenue models as a sort of layer eight, where all the various technology segments come together to provide users and buyers with value, and revenue is generated. Likewise, some refer to a layer zero that includes all the physical stuff (cables, connectors, power supplies) that create a network upon which data can flow.

source: Telecom Circle

In the internet of things businesses (present and future), one can note the same set of roles, with users and buyers at a hypothetical layer eight, using applications at layer seven, with components such as chips at layer one. The large point is that all the underlying roles lead ultimately to the creation of applications, which then drive the business models and services that are monetized.

Access providers (telcos, cable TV, satellite communications) can, and often do, operate at several layers. They have historically originated the application known as carrier voice, or carrier mobile messaging (SMS or text messaging). They also have had to create the physical networks to do so. In the distant past, some might have actually created the protocols and equipment to do so. These days, third parties mostly supply the actual networking equipment and software.

In the internet era, roles mostly are separated, though. All actual businesses operate at the hypothetical layer eight. But it also is useful to think of app providers such as Google, Amazon or Facebook as operating directly at layer seven to create the apps that underlie business models.

Somewhere below layer seven are the operational activities that access providers mostly are engaged in (building and operating communication networks).

source: A.T. Kearney

The point is that although businesses and revenue streams in the internet of things or other businesses are “layer eight,” the OSI model provides a general framework for understanding where other value chain participants operate. An entity can create and supply a connected car service, industrial IoT or smart agriculture or smart home services.

Others will build business models around the sensors, the analytics software or communications networks that enable the applications.

There are some obvious conclusions to be drawn. The various internet of things applications businesses will very likely require lots of scale. As with other applications (Facebook, Google, Amazon, Netflix), a few big providers are likely to emerge, in each IoT vertical market. Most access providers will likely play similar roles as they presently do (providing access services).

That obviously limits the financial upside, but also will likely be the logical way to participate. Over time, as the businesses grow, the relative share of value and revenue available to access providers tends to shrink, even as gross revenues can grow. For most access providers, that will have to do.

A few tier-one access providers will develop other roles, though, much as Comcast has created roles for itself beyond the access provider function, as an owner of content producing (networks and studios) or experience (theme parks) assets. That is what firms such as AT&T and Verizon are hoping to do in one or more IoT verticals as well.

It is easy to criticize firms for their failures. Telcos have in the past failed at moves into the core computing business, over the top apps, data center businesses, smart home appliances or specialized communications services. Cable TV companies tried for decades to figure out a role in the mobile business, without success.

Eventually, when success has happened, it has been through acquisition, not organic growth. No  matter. Where it is possible, tier one access providers are virtually compelled to try and seek roles at the layer eight business model level related to content and applications. Those are among the bigger opportunities in almost any ecosystem where communications networks are required.

Eventually, it is possible that 93 percent or so of all internet ecosystem revenues are earned elsewhere. And it is a fair assumption that roughly half of total revenue will be earned by the application providers.

source: STL Partners

Two Big Changes in Global Capacity Business

Much has changed in the global capacity business over the last few decades. Among the biggest changes is that so much global traffic is generated by a relatively small number of very big applications providers, not telcos moving traffic from central offices.

The other big change is that so much of global traffic now moves over private networks owned and operated by those relatively few huge app providers.

“Now networks are being built by hyperscalers,” says Tim Stronge, TeleGeography VP. That is a historic change.

On Latin American routes, about 70 percent of total traffic now moves over private networks. In other words, only about 30 percent of undersea, long haul traffic actually is sold to customers who use “public” networks,  according to Erick Contag, Globenet CEO.

On trans-Pacific routes, OTT app providers also are driving demand, accounting for about 33 percent of lit demand on the “public” networks, says Jonathan Kriegel, CEO Docomo Pacific.

“Content providers are removing a large portion of the customer base,” says Brianna Boudreau, TeleGeography senior analyst. That “makes the rest of the market extremely competitive.”

In other words, despite huge increases in capacity requirements every year, most of that growth is “private capacity,” used directly by the likes of Google and Facebook, and not part of the “public networks” market (that capacity is not purchased from a public networks supplier).

source: Google

Will Video Break Business Models?

Global traffic once was driven by voice. Then it was driven by internet data. Increasingly, traffic is dominated by video entertainment. That has serious business model issues for access providers.

That video now drives global traffic is uncontestable. There will be nine-times more mobile video traffic by 2021, according to Jean-Luc Valente, Cisco VP. Fully 75 percent of mobile data traffic will be video by 2021. That is important, in part, since as much as half of all traffic is generated by mobile devices, while by 2020 perhaps 70 percent of all traffic will be related to mobile devices.

So here’s the problem: video consumes huge and growing amounts of bandwidth (first small screen, then standard definition video, now high definition video and more intense formats coming. But much of that video drives no direct revenue. And most video that does drive direct revenue (streaming video services) is not owned by the access providers.

At the same time, the revenue which can be driven by internet access services has an average revenue problem: prices per gigabyte keep dropping. In fact, some would argue such prices (at retail) must drop, to sustain the OTT video model.

New unlimited usage plans featured by the top-four U.S. mobile operators, or zero-rated video plans, provide concrete examples of how that process continues to unfold.

source: Cisco

Some would note that bandwidth prices are plunging so much that overall network revenue per bit could even go negative within 10 years.

“Two decades ago, it would have cost almost $10,000 a month to get a data connection as fast as today's baseline internet wireline connections,” said Tom Nolle, CIMI Corp. principal. “Yet, the internet has pushed down revenue per bit transported so sharply that operators widely believe connection services will have a negative return on investment before the end of the decade.”

Indeed, revenue per gigabyte has been declining for some time, in the mobile and fixed realms.

source: Analysys Mason

The business model issue therefore has several key aspects. Revenue per gigabyte which can be earned by an access provider continues to drop. Up to some point, access providers can sell more units to offset declining prices, but only up to a point (unlimited usage or zero rating show the limits).

At the same time, the media type most desired by retail end users is video, which poses huge and growing capacity demands that require network upgrades, but without direct revenue increases to offset the investments.

Finally, consumers expect that subscription video or audio services will not require payment for consumed bandwidth. That pattern was set by broadcast radio, broadcast TV, then cable TV, satellite TV and telco TV. And though consumers understand they need to pay for internet access to watch Netflix or Amazon Prime, they likely would not pay for the incremental bandwidth correlated with their consumption, should that be proposed.

Video, in other words, has the potential to strain business models. Some think video could break the business model. The issue is simple. In the voice era, higher usage meant higher revenue.

In the era of internet video, greater usage does not necessarily drive much incremental revenue.

Wi-Fi Role Could Change in 5G Era

Price and quality matter, where it comes to user behavior related to use of internet access services and networks. In markets served by 3G networks, consumers chose to use Wi-Fi access because it saved them money, and provided a better experience. In most 4G markets, though “saving money” remains important, “quality” generally is not a driver, as 4G tends to be faster than Wi-Fi.

In the coming 5G era, it is conceivable that the new mobile network will eliminate “saving money” and “better quality” as reasons to offload access to Wi-Fi. That would represent a huge change in consumer behavior. To be sure, Wi-Fi will still be important. But its value to internet access constituencies could very well change.

If, in the 5G era, and even in the present 4G markets, unlimited usage plans eliminate both the advantages of “saving money” and “better experience” when switching to Wi-Fi.

On the other hand, some suppliers, particularly those with significant Wi-Fi assets, might find they can use Wi-Fi infrastructure to lower their mobile service operating and capital costs.

Likewise, mobile operators might benefit from bonding mobile access with Wi-Fi, in the “old way,” where offloading reduces traffic on the mobile network. But that advantage might be most valuable when customers are consuming video content, negligible to moderate for voice and messaging or internet access.

Revenue Per Bit is a Big Problem

Observers might disagree about how big a problem revenue per bit has gotten to be on most mobile networks. But everyone would agree it is a significant problem, as revenue per megabyte or revenue per gigabyte is quite low. 

After operating and capital investment, some might question how profitable mobile broadband services are, in some markets. A few might argue that mobile broadband, in some markets, already loses money. 

Business of Value Added Services in New Mobile Era: From Strategy and Business Models to Services Development for Telecoms Operators from Ali Saghaeian

Deutsche Telekom Launches StreamOn Unlimited Media Usage Plan

Deutsche Telekom has launched StreamOn, a new unlimited usage plan for its German customers, who now will be able to watch video and listen to music without incurring mobile data usage charges.

Almost certainly inspired by the success of the U.S. unit’s experience with such plans, DT has signed up Amazon, Apple, Netflix, Sky, YouTube and Deutsche Telekom's own Entertain TV offering as partners.

As seems always to be the case when technology disrupts the boundaries between formerly-discrete industries (TV and radio broadcasting, cable TV, telecom, print, social networks, shopping), old regulatory concepts become unwieldy and nonsensical, as firms selling the same services labor under different regulations.

Cable TV firms, for example, are regulated differently from telcos; VoIP often is regulated differently from carrier voice; over-the-top streaming video is handled differently than broadcast media or print.

More significantly, over the long term, is that business models and consumer expectations of each product do not change, simply because the delivery method changes.

Consumers do not expect to pay for bandwidth--which is an essential requirement for broadcast TV, broadcast radio, or any network-delivered video or audio service--when consuming traditional media.

As traditional “television” and “movie” media becomes internet media, those consumer expectations are not going to change. So zero rating is a business requirement.

Also, networks face physical issues. Video is hugely more bandwidth-intensive, but revenue per bit is quite low. There simply is no way media business models work if, in the switch to internet delivery, consumers pay for bandwidth in addition to cost of content.

Revenue per bit matters, even if no consumer ever sees such metrics, nor do service providers normally track it.  

The revenue per bit problem is easy to describe. Assume an ISP sells a triple-play package for a $130 a month retail price, where each component--voice, Internet access and entertainment video--is priced equally (an implied price of $43 for each component).

Ignore other cost of service elements, such as marketing and content acquisition fees. In term of network usage, that would make sense if each constituent service “consumed” roughly equivalent amounts of capacity, or if retail charging was based relatively directly on consumed bandwidth, and not “perceived value.”

Use of network resources is unbalanced, though. Voice requires use of almost no bandwidth, while video consumers nearly two orders of magnitude more capacity, for each minute of use. Internet traffic is in between, with some apps consuming little capacity (email), some apps consuming a moderate amount of capacity (web browsing) while others are heavy capacity consumers (video).

So, by some estimates, where voice might earn 35 cents per megabyte, revenue per Internet app might generate a few cents per megabyte. Recall that actual revenue per megabyte is statistical: it hinges on how much a user consumes after paying a flat fee for the right to use bandwidth.

MulteFire: Second or Third Coming of Personal Communications Service?

Sometimes, past is prologue where it comes to ideas, platforms and services in the telecom industry. Back in the 1990s, for example, at a time when mobile service was not used by most people, and was expensive, it was thought there was a market opportunity for a new type of service that would be half way between cordless indoor telephone service and fully-mobile outdoor service.

That concept, known as “Personal Communications Service (PCS)” lead to the entry of Sprint and what became T-Mobile US into the U.S. mobile market, using 2-GHz spectrum. The original thought was that PCS would be a pedestrian speed network, supporting cell tower handoff at pedestrian speeds.

Later, Cablevision Systems Corp., which studied and then shelved the idea, eventually did launch a similar service, essentially mobile phone service using unlicensed Wi-Fi spectrum exclusively. Much as did PCS, it never took off.

In a sense, MulteFire is a second coming of the older PCS idea. PCS was conceived as a communications service used by people moving at pedestrian speeds, with session handoff. The CableVision implementation did not feature session handoff, but could be used anywhere Wi-Fi access was available (indoor at the subscriber’s home or at public Wi-Fi locations).

It is not clear how MulteFire might develop, or which use cases prove to be sustainable. Some larger cable operators, such as Comcast, have huge deployed networks of Wi-Fi homespots that could provide a foundation for MulteFire networks spanning rather extensive geographies, even if call handoff might be a limitation.

But that is why most believe hybrid networks that can default to mobile networks are important. Google Fi, for example, uses a mobile-first model where users are connected first to Wi-Fi, then to either the Sprint or T-Mobile US network, depending on which network has the better signal at a specific location.

Even if we all know 4G as a mobile network standard, supporting mobile phone service, other new protocols, such as MulteFire, create the potential, for the first time, of 4G networks operated much as Wi-Fi networks are, using unlicensed spectrum and operating in indoor settings or as small cells.  

MulteFire is suitable for any spectrum band that requires over-the-air contention for fair sharing, such as the global 5 GHz unlicensed spectrum band or shared spectrum in the upcoming 3.5 GHz CBRS (Citizens Broadband Radio Service) band in the U.S. market.

Business models for networks running 4G LTE protocols in a private LTE mode might be likened to similar use of venue Wi-Fi. An enterprise might consider creating its own enterprise 4G network. There will be business model differences based on which spectrum is used. In the CBRS band, for example, a venue owner deploying MulteFire would have proprietary rights of a sort, being able to block other temporary MulteFire networks from being created by a user hotspot, for example.

Wholesale models, such as neutral host networks open for use by third parties, represent another new business model.

In some ways, MulteFire takes the old debate about whether Wi-Fi can replace licensed mobile networks to a new level. In the future, it will be possible to create 4G networks that operate exclusively using unlicensed spectrum, or in forms that bond licensed mobile spectrum with unlicensed Wi-Fi spectrum or other spectrum.  

MulteFire also is, in many ways, the latest iteration of any idea decades old, that there is room in the market for services that are someplace between full mobile and cordless telephone service.

Sometimes an idea is before its time, and demand or network infrastructures will not support the new ideas. We will see whether PCS is such an idea.