U.S. Fiber Access Business Case Shifts

For the first time in many decades, the business case for optical fiber access facilities in the U.S. market has changed. In the past, optical fiber was considered necessary to provide entertainment video and higher-speed internet access as retail services to consumers.

Consumer internet access still matters. The issue is how much the business case is changed, and on what scale, if distribution fiber and small cells support wireless access (mobile or fixed), without a full fiber to premises deployment.

In that sense, the question is really the payback from “fiber deep” distribution fiber, plus wireless access, compared to direct fiber to home alternatives, at least for fixed network telcos.

Where mobile carriers operate out of region (without existing fixed access network assets), and all the largest four mobile carriers do so for 100 percent to about 50 percent of the U.S. land mass, distribution fiber arguably is more crucial than access fiber. In other words, fiber to “small cell” locations is necessary.

That, in turn, could enable a fixed wireless strategy.

Just how much all that will cost is unclear at the moment.

U.S. telecom service providers need to invest between $130 billion and $150 billion in deployment of fiber facilities over the next five to seven years, according to new research from Deloitte, for a variety of reasons.

You would not be surprised if Deloitte sees the bulk of that investment related directly to consumer internet access. What seems to be different is that substantial portions of that investment, plus new fixed wireless opportunities, might allow new financial synergies between the consumer fixed network investment and investment to support the mobile network.

Such synergies might represent some 27 percent of the total fiber investment cost. In other words, the way distribution fiber is laid can cut about 27 percent off the full cost of fiber investment for all purposes (consumer and business, internal and retail services, urban and rural, mobile and fixed uses).

5G services will likely be commercialized on the back of an ultra dense network infrastructure–also fundamental to evolving LTE to support LTE-Advanced and LTE-Advanced Pro features–with a heavy emphasis on small cells.

source:Deloitte

Many Reasons Why U.S. Fixed Network Broadband Investment Lags

Many observers would say U.S. fixed network telcos have not invested fast enough in optical fiber access facilities. There are many reasons, including uncertain payback and payback that does not come fast enough.

Sheer geography is one reason. In Canada, fiber to the home covers 90 percent of the population by covering three percent of the land mass. In Australia, 90 percent of the population can be outfitted with fiber to home by covering four percent of the land mass.

In the United States, covering 90 percent of the population with fiber to home facilities requires covering 31 percent of the land mass.

In other words, in Canada, 14 percent of the people live in areas of density between five and 50 people per square kilometer. In Australia, 18 percent of people live in such rural areas.

In the United States, 37 percent of the population lives in rural areas with less than 50 people per square kilometer.

Put another way, less than two percent of Canadians and four percent of Australians live in such rural areas. In the United States, fully 48 percent of people live in such areas.

The point is that the business model for fixed network access, and fiber to the home, is vastly complicated in the U.S. market by low population density over much of the land mass.

As big as Canada and Australia are, in terms of land mass, few people live in low-density and rural areas.

That is one reason Google and Facebook might consider the U.S. a target market for new access systems based on balloon fleets or unmanned aerial vehicles, and why satellite access has been a significant platform across the rural United States.

source: Deloitte

But there are other issues as well.

Expected fixed network capital investment ranges between 14 percent and 18 percent of revenue, while operating expenses can range as high as 80 percent of revenue, according to Deloitte consultants.

Fiber deployment in access networks is only justified if a short payback period is guaranteed, a new footprint is being built, repairs from rebuilding after a storm or other event justifies replacement or in subsidized geographies where Universal Service funds can be used.

So one implication is that opex has to be reduced, so that more can be invested in capex, especially optical fiber access.

Excessive operating expenditures are caused, in substantial part, by legacy TDM network technology, while stranded TDM assets continue to increase (no revenue can be generated from the assets).

Generating sufficient cash flow to motivate fiber upgrades means building a business model based on simplicity and capital productivity, Deloitte argues. And that requires an expeditious retirement of the legacy infrastructure, and its replacement by an all-IP network.

Consider that mobile operators, not required to support legacy services, require approximately an eighth the care staff and receive half as many inbound calls per customer compared to wireline network operators.

French wireless and wireline provider Iliad, for example, operates an all-IP network with approximately three to four employees per 10,000 customers compared to 12 to 15 employees per 10,000 customers for U.S. fixed network service providers.

Important as they are, IP migration and regulatory reforms will not be enough to create the financial case for deep fiber deployment that is needed for broadband and densification, though.

New ways to monetize “last mile” access as an incentive for massive fiber deployment. Call that an example of why service providers must “move up the stack,” add more value and occupy new niches in the ecosystem.

Unlicensed, Shared Spectrum Roles Growing

Growing use of unlicensed (unlicensed spectrum aggregated with licensed spectrum) and shared spectrum (Citizens Broadband Radio Service) to support mobile communications will create new opportunities for competitors or partners in the mobile access business.

Given power restrictions in unlicensed and shared spectrum, these technologies are most suitable for small cell indoor or venue deployments, one can argue. That will benefit mobile service providers serving indoor or other venues such as sports stadiums or campuses.

But availability of aggregated and shared spectrum (CBRS) might also create new opportunities for “venue communications providers” or new entrants in the mobile business (cable companies, Google, others).

With low to no spectrum acquisition costs and deployment economics comparable to Wi-Fi, in-building wireless penetration in the vast middle-sized and enterprise verticals will increase dramatically and account for more than half of in-building small cell shipments in 2021, ABI predicts.

ABI Research predicts that new LTE unlicensed and shared spectrum technologies will launch a US$1.7 billion hardware market over the next five years, including LTE Unlicensed, CBRS, and MulteFire (4G using unlicensed spectrum) deployments.

“LTE-U/LAA will appeal to MNOs planning to densify but with insufficient spectrum or CAPEX to acquire it,” says Nick Marshall, Research Director at ABI Research. “Meanwhile, MulteFire and CBRS technologies promise very low network buildout costs with economics that threaten to disrupt the DAS market.”

AT&T Expands Fixed Wireless Coverage

AT&T is using  fixed wireless to provide internet access to 400,000 locations by the end of 2017 and over 1.1 million locations by 2020. The service is now available in eight new states, AT&T says.

More than 70,000 locations can now use fixed wireless for internet access in underserved or unserved areas across nine original states.

The new states include Alabama Florida Kentucky Mississippi North Carolina South Carolina Tennessee and Louisiana.

AT&T further plans to launch fixed wireless service in additional states overall later in 2017. The additional states are Arkansas, California, Illinois, Indiana, Kansas, Michigan, Ohio, Texas and Wisconsin.

The service delivers a home internet connection with download speeds of at least 10 Mbps.

Cable Giants Explore Sprint Deal

Talks are not deals, but at least for two months, Sprint, Charter Communications and Comcast reportedly will explore possible deals, ranging likely from investments in Sprint by Charter and Comcast or even acquisitions or mergers, though most believe that is less likely.

One possible deal would involve an investment in Sprint by Charter and Comcast, which also would include favorable discounts on wholesale capacity provided by Sprint to Charter and Comcast, both of which are launching their own branded mobile services, using a mobile virtual network operrator deal with Verizon.

We can assume the cable companies are not happy about the business case, using Verizon's deal.

Any such deal would undoubtedly be structured in a way that does not prevent later talks between Sprint and T-Mobile US about a merger of those two firms.

A wholesale capacity arrangement with Sprint would allow the cable companies to lower operating costs, compared to the deal they have with Verizon, it is believed. Such a deal also would make possible the sort of “Wi-Fi first” service offered by Google Fi and Republic Wireless, which connect to a mobile network only when adequate Wi-Fi is not available.

Though the firms might deny the possibility now, sooner or later, Charter and Comcast will want “owner’s economics” for their mobile services. That does not necessarily entail buying Sprint or T-Mobile US outright.

In principle, other sources of spectrum are available, and in principle, the cable companies could contract with other parties to build and possibly operate such a network, at least for a time. Dish Network has spectrum that could be acquired, or Sprint could sell some spectrum to the cable companies. Eventually, both also could use unlicensed, shared or new millimeter wave spectrum becoming available in the U.S. market.

None of that seems especially likely in the near term, though. For the moment, the cable firms need coverage, above all, without the added expense of network operations costs.

In one sense, the possible moves indicate the new perceived value of mobility for video entertainment delivery, which in its linear form mostly has been delivered by fixed networks (either terrestrial or by satellite means). But in an over the top and on-demand environment, more content is being consumed using mobile devices.

That obviously has big implications for legacy linear video providers.

Also, bundles have been important value-boosting and retention-enhancing tools for some time. So adding mobility increases the value of cable bundles.

Though a full bid to merge Sprint with the two cable companies seems unlikely, for the moment, such a move would likely have a far easier time to gaining anti-trust approval, as it would not reduce the number of leading mobile providers in the market, as would a Sprint merger with T-Mobile US.

Some Actually Want Policies that Slow More Fiber to the Customer

Most observers would agree that replacing old copper with new optical fiber is a good idea. As with every public policy framework, not everybody always agrees, though.

Some advocate keeping copper in place. Non-facilities-based local access providers in the U.S. market want copper to remain in place, so they can use that copper to compete with the owners of the copper access facilities.

And some of the same policy advocates who generally complain that fiber is not being installed fast enough, often always support more investment in new copper access, moves that make the business case for transition to all-fiber facilities even harder.

So even if it remains a logical public policy stance to move as expeditiously as possible to all-fiber fixed networks, there always is opposition.

For every public purpose, there are corresponding private interests. Some of those private interests actually delay the fastest-possible transition to all-fiber access in the fixed network.

LPWA Connectivity Market Remains Nascent

The GSMA today announced that its Mobile IoT Initiative has lead to the launch of multiple commercial rollouts of Low Power, Wide Area (LPWA) solutions using licensed mobile spectrum, by several of the world’s leading mobile operators including AT&T, China Mobile, China Unicom, China Telecom, Deutsche Telekom (DT), Verizon and Vodafone.

It is likely such efforts produce relatively little revenue yet, as LPWA networks are not so prevalent, yet, and traditional mobile connections (on the standard mobile networks)  likely drive nearly all the present revenue.

At present, U.S. mobile service providers likely earn only a couple of billion dollars a year from IoT connections. By some estimates, IoT accounts already represent existing connectivity revenue of about $3 billion in China.

The larger point is that it still is much too early to say very much about how big the IoT connectivity market might eventually become.

“IoT connectivity revenue will only reach US$28 billion by 2025, representing just three percent  of worldwide mobile telecoms revenue,” according to Analysys Mason.

source: Analysys Mason

“If IoT is to become a new growth area within the telecoms industry, it will need to contribute significantly more revenue to the overall business than connectivity alone can generate,” Analysys Mason notes.

China Mobile and China Unicom have launched NB-IoT across several key cities with China Telecom launching NB-IoT networks across the country. Vodafone has also launched NB-IoT in Spain and the Netherlands.

DT has launched in several cities in Germany and nationwide in the Netherlands. AT&T and Verizon have previously announced nationwide launches of LTE-M technology.

In addition to these deployments, the GSMA also announced that its Mobile IoT Innovators programme, which is designed to encourage the development of new LPWA solutions, has reached over 500 members, underscoring the growth of the wider IoT ecosystem.  

Gartner forecasts that 8.4 billion connected things will be in use worldwide in 2017, up 31 percent from 2016, and will reach 20.4 billion by 2020. Total spending on endpoints and services will reach almost $2 trillion in 2017.

Regionally, Greater China, North America and Western Europe are driving the use of connected things and the three regions together will represent 67 percent of the overall IoT installed base in 2017, Gartner argues.

The consumer segment is the largest user of connected things with 5.2 billion units in 2017, which represents 63 percent of the overall number of applications in use.

"Aside from automotive systems, the applications that will be most in use by consumers will be smart TVs and digital set-top boxes, while smart electric meters and commercial security cameras will be most in use by businesses," said Peter Middleton, research director at Gartner.

IoT Units Installed Base by Category (Millions of Units)
Category	2016	2017	2018	2020
Consumer	3,963.0	5,244.3	7,036.3	12,863.0
Business: Cross-Industry	1,102.1	1,501.0	2,132.6	4,381.4
Business: Vertical-Specific	1,316.6	1,635.4	2,027.7	3,171.0
Grand Total	6,381.8	8,380.6	11,196.6	20,415.4

Source: Gartner

In addition to smart meters, applications tailored to specific industry verticals (including manufacturing field devices, process sensors for electrical generating plants and real-time location devices for healthcare) will drive the use of connected things among businesses through 2017, with 1.6 billion units deployed.

From 2018 onwards, cross-industry devices, such as those targeted at smart buildings (including LED lighting, HVAC and physical security systems) will take the lead as connectivity is driven into higher-volume, lower cost devices, Gartner predicts.

While consumers purchase more devices, businesses spend more. In 2017, in terms of hardware spending, the use of connected things among businesses will drive $964 billion.

Consumer applications will amount to $725 billion in 2017. By 2020, hardware spending from both segments will reach almost $3 trillion.

IoT Endpoint Spending by Category (Millions of Dollars)
Category	2016	2017	2018	2020
Consumer	532,515	725,696	985,348	1,494,466
Business: Cross-Industry	212,069	280,059	372,989	567,659
Business: Vertical-Specific	634,921	683,817	736,543	863,662
Grand Total	1,379,505	1,689,572	2,094,881	2,925,787

Source: Gartner

Total IoT services spending (professional, consumer and connectivity services) is on pace to reach $273 billion in 2017, Gartner argues. The huge proportion of that spending is on the actual IoT applications (including recurring fees) or the design and installation of such networks.

source: Analysys Mason

source: Machina Research