Capex Estimates Hinge on Assumptions, Since it All is At the Margin

Assumptions always matter when conducting studies. But assumptions also are important when looking at levels of capital investment at aggregate levels. Firm priorities can vary. Industry segment patterns can be quite distinct. Also, "capex" includes all manner of investments not directly related to network investment. 

It is worth noting that “capex” includes lots of spending (trucks, customer premises equipment, international spending, smartphone leasing, buildings and computing gear) that might not contribute to our assessment of “network” investment.

Also, big mergers and acquisitions, plus spending on customer premises equipment, can skew reported capex. When total spending is deemed to have changed in low single digits, such nuances can make the difference between growth or decline, on a reported basis.

USTelecom’s seventh annual report on U.S. broadband investment numbers is not available yet, but “our initial analysis strongly suggests that investment in 2016 continued to trend downward following the Federal Communications Commission’s (FCC) adoption of the 2015 Open Internet Order,” says Patrick Brogan, UST VP.

Data compiled from internet service providers representing 90 percent to 95 percent of annual industry capital expenditures, suggests the dip in broadband investment UST reported on in 2015 was not a one-off occurrence.

In 2016, capital expenditures was $71 billion, down from $73 billion in 2015 and $74 billion in 2014, UST says, an amount $2.5 billion to $3 billion lower in 2016 than it was in 2014, the year before the FCC adopted Title II utility regulations.

The amount of U.S. capital investment  is highly contested. Clearly, cable TV operator capex was up; fixed network capex was down and mobile capex was up, though one has to adjust for the impact of handset subsidy accounting rules. Financing of smartphone handsets is “capex” under accounting rules, but does not help us understand changes in network capex.

That noted, some studies suggest higher capex under common carrier rules, while others argue the opposite case.  

For others, what would have happened is the key issue.

source: USTA

Claims by some that broadband provider capex increased in 2015 and 2016 ignore accounting adjustments for certain non-material items like leased cellphones and acquisitions, such as AT&T’s merger with DirecTV and a Mexican wireless operation, UST argues.

The crucial question is what would have capex been if Title II had not been imposed, controlling for other factors.

IoT Connectivity: "All of the Above"

By most estimates, device connectivity revenue might represent as little as five percent or perhaps 10 percent of the new revenue to be created by most internet of things applications and services. Among the reasons is that existing connectivity solutions could well play a part

Short-range access methods such as Bluetooth, Wi-Fi, and 802.15.4, for example, could be device connectivity options that leverage existing network access services. To the extent that happens, nearly zero incremental access revenue is created.

ABI Research forecasts IoT will represent 15 percent of Wi-Fi, 27 percent of Bluetooth, and over 60 percent of 802.15.4 device shipments by 2022.

LPWAN and legacy M2M cellular technologies are set to ship nearly 575 million chipsets by 2022, growing faster than any short-range connectivity solution across IoT verticals.

ABI Research finds that cellular and LPWAN technologies, often perceived as more reliable than short-range connectivity solutions, require less intermediary gateways, can support greater distances between end nodes, and scale from the very smallest to the largest number of end devices, while providing a battery life that exceeds 10 years.

It is reasonable to assume widespread use of existing short-range access methods to support consumer wearable apps. It might not be so much the case for enterprise and business apps, which might require higher perceived reliability or reach.

“These technologies are specifically designed for IoT and are arguably much better matches for outdoor, larger-scale IoT applications due to their abilities to target greater coverage areas, their ease of deployment, and their greater scalability,” says says Andrew Zignani, Senior Analyst at ABI Research.

Wholesale is Among AT&T's Smart Cities Revenue Opportunities

There seems to be growing recognition that internet of things will create incremental revenue opportunities for access providers, but not as much incremental revenue as will applications in a number of vertical settings, ranging from water and lighting grids to urban transportation and parking.

Connectivity alone accounts for between five percent and 10 percent of the smart cities value chain, says Mike Zeto, general manager of AT&T's smart cities business unit. Among the opportunities AT&T sees is the chance to license its platforms to other telcos, providing a wholesale applications capability that is subscriber information module based, and can then be bundled with the access services partners already operate.

source: AT&T

Business Case is the Big Issue for 5G

Bob Everson, mobility domain leader for Cisco’s Global Service Provider segment, points out that a  clear business case as their most significant service provider concern about 5G. That is logical, considering that the big new use cases for 5G are more about internet of things and non-human users, than new use cases for humans. Fixed wireless would seem to be the big new opportunity, near term. 

Advanced 4G Underpins 5G, Says AT&T Director Brian Daly

Brian Daly, AT&T director of core and government/regulatory standards, emphasizes not only that 4G will underpin 5G for a long time, but also that 5G is about both fixed and mobile access. 

FCC Moves to End Common Carrier Regulation of Internet Access

As expected, the U.S. Federal Communications Commission has voted to open a proceeding on internet access regulation, seeking what it calls a return to “light touch” regulation, and specifically, reconsidering regulation of internet access services under common carrier rules, something that was instituted in 2015. The proposal would return internet access to the “information service” category it had held for decades.

Some have supported the shift to common carrier regulation for a few stated reasons, including protecting edge providers (app providers) from “paid prioritization” schemes instituted by major internet service providers. Others opposed the common carrier rules because it limited permissible business models based on quality of service.

The ironic twist is that the viability of “paid prioritization” is questionable. Few seem to believe it is possible to create a sustainable market for such services.

Dr. George Ford, The Phoenix Center chief economist, argues that “no paid prioritization rule, from an economist’s point of view, should not be prohibited on a blanket basis.”

But that is not the same as arguing there is a clear consumer demand, or sustainable business case. “I’m not sure there is a business case.”

It is not that such possible payments are unusual. They are not. Two-sided markets in media, content and retailing are rather common, where an entity connects buyers and sellers, generating revenue from one set of partners, or sometimes from both. Any retailer--physical or online--can generate revenue from consumer buyers and product sellers.

Content networks earn money from distributors (satellite, cable TV, telco TV, Netflix, Prime) and advertisers. Distributors earn fees from subscribers (end users) as well as advertisers.

“Some sort of payment from a content provider is not that unusual,” says Russ Hanser, Wilkinson, Barker Knauer partner. “Is there a business model? I don’t know.”

There are analogies. The best example is the content delivery network (CDN), where content or app providers pay a third party to expedite delivery of packets over backbone networks, controlling latency. By extension, some have proposed there might be a market, or markets, related to providing latency protection issues in the consumer access services business.

The issue is whether direct revenue models can be created, and if so, how big those markets could be. The argument is that some apps, especially voice, videoconferencing and highly-transactional apps (gaming, for example) benefit enough from latency control that entities (app providers or end users) are willing to pay to have that capability. As always, consumers are resistant to value-added services, so value is less a question than propensity to pay.

Zero rating is sort of the mirror opposite of that issue. Where there clearly is a large market is allowing users to consume as much bandwidth as required to stream video or listen to audio. Where paid prioritization concerns revenue paid to ISPs by app providers, zero rating actually allows app providers to be used without any concern for mobile data usage limits.

In such cases, any revenue benefit is indirect, taking the form of higher new account additions or reduced churn. Eventually, ISP owners of their own subscription content services obviously will benefit more directly in the form of revenue earned by selling content subscriptions.

So far, it is not clear whether there is a market for paid prioritization. And, if so, it is not clear that the market is big.

Voice Hasn't Been Core for Mobile Since 3G

Looking at all the standards activity around 5G, it is easy enough to see reflections of the reality that voice is a fundamental feature for a communications provider, but drives a declining portion of revenue. All of the future revenue upside, in other words, comes from internet access and the services that access enables.  

Simply put, all the 5G activity is around mobile and fixed data. It is not clear that voice ever again will be a primary problem to be solved.

Some might argue that voice might become a bigger concern for mobile generation seven. Others might argue 3G was the last mobile network platform centrally concerned with voice.

Many speculate that mobile generation six could focus more on integrating mobile and satellite links, as 5G integrates licensed and unlicensed spectrum. That might also be an indication that mobile issues, as such, largely have been developed to a point where commercial attention turns elsewhere.

For the moment, most service providers in developed markets are trying to harvest voice revenues. In developing markets, voice remains a key revenue driver, particularly because subscription growth remains relatively high.

source: GSMA

In fact, we might be entering an era where mobile data becomes more akin to a feature than a revenue driver as well, following the pattern of voice services. To be sure, voice over LTE is expected to grow, in the 4G realm. Other forms of voice using an over-the-top method also will grow, though.

If you take the long view, some “news” items are not surprising. If you observe that mobile data revenues are peaking, then it is not too surprising when a decline occurs. Analyst Chetan Sharma notes that U.S. mobile data services revenue had seen quarter-over-quarter growth for 17 straight years until the first quarter of 2017.

In that quarter, revenue growth went negative.

Verizon saw its first-ever decline in service revenues, year over year.

For the first time, industry postpaid net-adds also were negative, while, for the first time, cars accounted for 50 percent of the total net-adds for the quarter, Sharma notes.

A product lifecycle top has been coming for some time. In developed markets, after “everyone who wants to use mobile” is doing so, and when “everyone who wants to use mobile data” is doing so, and when “everyone uses as much as they need”, the market simply is saturated.

And that means, as executives have understood, drives the search for big sources of new revenue to displace the lift once provided by mobile data services.

So 5G is not simply the latest in a series of mobile network generations, defined in part by air interface or data rate. In fact, that often is the way 5G is described.  No, 5G is something else, a deliberate attempt to build a network with intrinsic support for non-human users (internet of things).

Some might note that this is precisely what many have called pervasive computing, a world in which almost anything can have computing and communications embedded.

That might not be so obvious at first, as the first “at scale” deployments of 5G will focus on extending services for humans (“enhanced mobile broadband”). Ironically, though mobile data is reaching saturation, the first “at scale” revenue benefits and value might well be generated by mobile or fixed broadband.

Most industry executives seem to agree that, at first, most of the customer-observed value will come from higher data rates. None of that should obscure the more fundamental hope, though. And that is that 5G networks will enable a big new internet of things business delivering services to non-human users.

Among the biggest hoped-for changes is in business model. Industry executives believe that new revenues disproportionately will come from enterprises, not consumers, undoubtedly a reflection of the expectation that the incremental new revenue streams will be created by various internet of things services and applications.