Content is One Way to Move Up the Stack

Reliance Jio’s use of content to drive interest in its 4G service is going to cause other mobile service providers to respond, analysts now say.

“We expect Jio to be competitive in the race for IPL digital rights, and incumbent telcos may need to revisit their OTT (over-the-top) strategy as Jio is the only telco whose OTT offerings (JioTV and JioCinema) already feature among the top 10 video streaming apps in terms of monthly active usage during the January-to June 2017 period,” said Rajiv Sharma, HSBC director and telecoms analyst.

That emphasis on content illustrates one key facet of access provider strategy in the internet era, namely that “dumb pipe” really is the foundation of the new business, as all applications--including those competing with access provider apps-- can be created independently, by third parties, without the access provider’s permission.

By packaging third party content with its access service, Reliance Jio not only differentiates its access service, but directly stimulates demand for the access and its own branded handsets.

But even that is not the key benefit. To the extent that value lies at the application layer, Jio becomes a supplier of that value (content), with direct participation in application revenues generated by that additional value.

That will be the pattern for enterprise and business segments of the business as well. Unless an access provider is content to eke out a living selling “pipe” (internet access and enterprise data networks with declining revenue-per-bit characteristics), it must create an additional role as a “service provider.”

We sometimes forget that voice and messaging once were services 100-percent controlled by the access provider, down to the details of what devices could be attached and used on the network. All that ends in the internet era.

Carrier voice, messaging and content subscriptions remain “services” created, sold and owned by the access provider. Internet access, though, is the first mass market “dumb pipe” offering where the value is created entirely by third parties (value is created by use of all apps accessible on the internet, the internet access itself truly is a dumb pipe).

That will become increasingly clear as the era of pervasive computing emerges, enabled by 5G and “internet of things” networks. Most of the revenue and most of the value will be created by the IoT platforms, devices and apps, not the access. That will be a key problem for most access providers, as creating new application revenues seem still to be quite difficult for most access providers.

To participate in the upside, access providers will have to seek roles beyond mere supply of connections for IoT devices. Even NTT, long a leader in creating new application-based revenue streams, still earns the overwhelming share of total revenues from access services (if you will pardon the lumping of mobile and fixed subscriptions in the “access” category).

According to  Ovum, access providers will grow their revenues from managed global services to enterprise customers to at least US$297 billion by 2020.

The biggest contribution will come from new strategic ICT service revenues at nearly US$173 billion, which will increase at a compound annual growth rate of 9.9 percent over the period 2015 to 2020, Ovum says.

Strategic ICT services include business IT and IP applications, compute and hosting, enterprise mobility, managed networks, professional services, and unified communications.

Verizon Makes Huge Innovation in Fiber-to-X Network Designs

Mass market optical fiber designs do not change radically, very often, in the U.S. market. Over a process of three to four decades, we have settled into some clear design buckets, including the cable TV hybrid fiber coax network; fiber to the home (FTTH) and fiber “to the neighborhood.”

There has been a shift from active to passive designs for FTTH, but the fundamental choices have been fairly well understood for some time.

But give Verizon credit for making a huge innovation that recasts the whole "fiber to the premises" issue. You might argue the change separates the entire issue of drop (access) media from the issue of how to build trunking networks.

The new fiber-deep design essentially builds a multipurpose optical distribution network (trunking network) and leaves the actual drop media decision for later (supporting either optical access for business or wireless access).

Verizon now is building the fiber-deep trunking network in Boston, and likely will follow in other areas.

We do not yet have a well-understood and generally-accepted moniker for the design, which basically installs cables with huge numbers of fibers, virtually ubiquitously (to locations representing about every light pole, in principle).

“The architecture that we're building in Boston, and now in other cities around, is a multi-use” fiber-deep design, Verizon says, where “every light post becomes a potential small cell for 5G.”

That same network is designed to have enough fibers to handle enterprise connections, small business and also serve as the small cell foundation for mobile and fixed consumer access.

If Verizon is correct, then the economics of gigabit internet access for consumers will change significantly, not least because the optical fiber distribution cost is partially defrayed by revenues earned by serving enterprise and business customers, as well as the mobile small cell network.

The drops for gigabit consumer services then will be fixed wireless, using unlicensed or lightly-licensed spectrum. The implications for consumer gigabit access could be huge.

It remains to be seen if the actual cost of a fixed wireless connection using 28 GHz and 39 GHz assets will actually be “miniscule,” as Verizon executives have suggested. But Verizon already believes it can deliver gigabit speeds at distances of perhaps 1,000 feet or so.

That is important since street lights are spaced at distances from 100 feet (30.5 meters) to 400 feet (122 meters) on local roads. In principle, putting radios on every other light pole could mean a radio radius of about 200 feet to 800 feet, well within tested propagation ranges. Putting radios on every light pole would shrink the radius to 100 feet to 400 feet, and allow for more path diversity, in case of obstructions.

If, as some others expect, millimeter wave small cells have a transmission radius of about 50 meters (165 feet) to 200 meters (perhaps a tenth of a mile), it is easy to predict that an unusually-dense backhaul network easily can support radio drops from small cell networks that could number as many as 100,000 in an area such as Manhattan.

That fiber to the light pole network would be the first major innovation in fiber access networks for decades.

Boot Camp for a Radically-Different World

The non-profit PTC has for some time held training events for mid-career professionals. This year, for the first time, PTC has organized a week-long program of value to promising members of regulatory and policy organization staffs.

source: Nokia

At the Industry Transformation Boot Camp (including Spectrum Futures and PTC Academy), students will learn:

• Strategy for a business consolidating from 810 service providers to 105, in 10 years
• What drives the change
• What industry structure will emerge
• How revenue will be earned
• How 5G sets the stage
• Who wins, who loses, as part of the change
• How to prepare for the changes

The educational event earns students a certificate of completion, and also immerses them in tutorials and case study exercises preparing them for the most-rapid transformation of the telecom industry in half a century.

The week-long training event, including Spectrum Futures and PTC Academy curricula,  especially is designed to train top-level and mid-career staff on what is coming and why.

Full week discounts are available, especially for organizations who may wish to send several staff members.

Email spectrumfutures@ptc.org to discuss the Boot Camp program.

If I Do Not Buy a Tesla, Is that a Supply Problem?

If a particular product is widely available, and yet consumers do not want to buy it, is that a market failure, or simply a reflection of consumer choice? That is among the potential issues report on U.K. internet access might raise when it is released.

Initial reports suggest the report will show a wider availability gap than prior reports have suggested. That might be a methodological issue, many argue, as the report conflates availability with take rates. In other words, it mixes demand and supply metrics when it ought to measure either supply or demand, but not both, as a single measure.

That is important. To use a common example, I might choose not to buy a Tesla, even when Tesla availability is not an issue. That is not a market failure. That is a consumer choice.

In other markets, such as the United States, there is likely to be continuing gap between locations that can buy a gigabit internet access service, and accounts or locations that choose to buy.

When gigabit internet access service becomes widely available, it is possible, perhaps certain, that most consumers will choose to buy some other tier of service, where it is available, on entirely reasonable grounds. They might simply conclude that some other lower-speed option satisfies all their needs, at lower price.

Some observers will use more-stringent criteria for evaluating adoption, such as including retail price (“affordability”) in addition to availability as a measure of “success.” There is logic to that approach, as well. Perhaps a more-refined way of making such measurements is to compare internet access price to household income, stipulating that access should not be more than X percent of such income.

Yet others might add the additional criteria of multiple providers in a market as a criteria for success.

The point is that there are many potential criteria for assessing the success providers have had at getting fast internet access to market. Availability matters.

But once supply is in place, demand takes over. The actual percentage buying a particular offer is less important.

In coming years that is likely to be more important, as mobile internet access increasingly becomes a full substitute for fixed internet access.

Can Telecom Industry Afford its Coming Consolidation?

While there always are lots of reasons why a particular merger idea does not get traction, one is worrisome for any weaker firm: potential acquirers believe the asset is going to depreciate further.

That, in fact, is one strategy some have floated for “when” to make a bid to acquire Sprint, or any other major set of telecom access assets.

“Not now” is the rationale some would put forward, even if a later bid makes sense. Some would argue Sprint has not stabilized its business. Others might argue the asset will be available for less money, later, because they sense Sprint cannot fix its problems.

That is likely to be a growing issue over the next decade as a huge wave of consolidation starts to sweep over the telecom industry. At a high level, here is the problem. It will take huge amounts of capital if 85 percent of today’s telecom assets are acquired over a 10-year period.

One can question whether enough borrowing power exists to get that done, if at the same time capital is plowed into building new 5G networks and, at the same time, tier-one providers make investments in new businesses “up the stack” that are meaningful contributors to present or future revenue streams.

Assume, as a figure of merit, that a telecom company can be purchased for about twice its annual revenue. Assume annual telecom industry capex is about $355 billion, but that these amounts are going to be needed to build the coming 5G networks, as well as maintain existing networks.

Assume annual industry revenues are in the range of $2.4 trillion. Assume 85 percent of total assets are acquired over a decade. That suggests $2 trillion of revenue. At a multiple of “two times revenue,” that implies an investment of about $4 trillion over a decade, to consolidate 85 percent of today’s assets.

Assume global telecom debt stands at a bit less than $1.5 trillion. Assume half of the consolidation is comprised of no-cash mergers of equals. That leaves about $2 trillion of new debt to be funded. In other words, global service provider debt would more than double over a decade.

You can make your own decisions about whether that is possible, much less a workable scenario.

Some of us might argue that new debt load does not account for any investments in new lines of business at the application or platform layers (content, apps, middleware, operating systems).

Assume such investments eventually have to be made at a significant level to have any hope of affecting telecom service provider earnings. Assume that means a level of investment at least as large as the investments in horizontal scale.

That implies an additional debt load of perhaps $2 trillion, for a total new debt load of about $4 trillion.

For an industry that arguably will have issues covering $1.5 trillion in debt, you might wonder whether it is even conceivable that lenders will approve debt levels of as much as $5.5 trillion.

But there is one way to reduce some of the debt burden: a collapse of equity values, which makes the acquired assets much less expensive. That will be the case, earlier, in markets where assets become “distressed” sooner rather than later.

Verizon Touts Shift to Fiber Products, Net Growth is Nil

“Organically, fiber-based products grew more than three percent” (in the second quarter of 2017) said Matthew Ellis, Verizon CFO. Many will interpret that as a sign of clear progress for the FiOS network, and it is, in many respects.

One always has to evaluate “new” revenue from next generation platforms on a “net” basis, as is the case for other statistics such as mobile account gains. The simple reason is that a legacy or incumbent provider mostly finds that the next-generation platform cannibalizes some existing revenue, while hopefully creating incrementally-new revenue streams.

So it is with Verizon’s fixed network operations. “On an organic basis, wireline segment revenue decreased 2.8 percent compared to a decline of 3.2 percent last quarter,” said Ellis. “This shift in the wireline revenue trend towards fiber is growing.”

So FiOS and fiber-based revenue was up three percent, while segment revenue was down 2.8 percent.

source: Verizon  

In the fixed networks business, a good example of the former is consumer shifts from digital subscriber line to optical fiber or fixed wireless services. When a current customer takes the newer service, but drops the older service, there is zero net account change.

That is going to happen for most human 4G accounts, which eventually will be dropped for 5G accounts, again with zero net change, even if headline numbers will trumpet the growth of 5G subscribers and accounts.

On the other hand, next generation platforms sometimes clearly create new incremental revenue streams. Video entertainment services--not possible on a narrowband network--is the best example in the fixed network realm.

Video also is arguably the best example of a new capability for 4G, compared to 3G, although others might point to tethering or general web access as other areas where there are indirect but key differences from 3G capabilities.

The key challenge for 5G is the magnitude of new revenue that can be created from new services beyond replacement of existing 4G use cases.

Value is What the Customer Says it Is

In the end, “value” is always what the customer says it is, even if suppliers spend lots of time trying to shape those perceptions. Consider “gigabit per second internet access.” That’s better than 40 Mbps or 100 Mbps, right?

As with all “you would rather?” or “which is better?” exercises, nothing much matters until price is part of the decision matrix. I would tell you a Tesla is better than a Hyundai, but that is an abstraction. The chances I’d actually buy a Tesla, compared to a Hyundai, are very low, because value is the issue, not only “quality.”

So it is that most Comcast customers, able to buy gigabit internet access service or lower speeds for less money, likely choose to buy the midrange speeds at the midrange price.

“Nearly 55 percent of our residential customers take speeds of 100 megabits per second or higher,” said Michael Cavanagh, Comcast CFO. All that one statistic tells you is that 45 percent of consumers buy speeds less than 100 Mbps.

It does not yet tell you what percentage of customers will shift to gigabit services, from all other speed tiers. One would predict that relatively few will do so.

Consider the behavior of Comcast’s initial Xfinity Mobile customer base. You would say these are the early adopters, and that might lead you to believe these early customers are the “high performance” segment of the audience. That does not seem to be the case.

“Most of our (mobile) customers are taking ‘by the gig’ (plans) versus unlimited,” said Dave Watson, Comcast Cable CEO. In other words, the lead adopters seem to be “value” segments, not “bleeding edge” segments of Comcast’s customer base.

Rarely, in consumer telecom markets, do most customers buy the “best” or “basic” packages of any product. Most buy the “better” or midrange packages, instead. The likely explanation is that customers see the best balance of features and price (“value”) in such packages. And suppliers likely anticipate that reaction and build their retail packages accordingly.

The point is that gigabit internet access is going to be a key marketing position, even if it does not represent the bulk of sales for firms about to offer basic-better-best packages. What gigabit does is shift the dynamic range of the potential offers, creating new “super-premium” tiers and also redefining “basic” and “better” tiers.

But consumers will still buy based on value, and for most, the midrange will still fit best.