Competition Versus Investment: U.S. Regulators Might Face Dilemma European Regulators Have Faced

Telecom regulators and policymakers often face trade offs. They desire maximum feasible competition, but also maximum feasible investment in next generation facilities. The two objectives lie in a state of tension. Too much competition dampens investment. But too little competition also dampens investment.

The trick is finding the balance. In the European Community, regulators have fostered competition so well that incentives to invest now are viewed as having suffered. To create incentives for investment, rules on competition might need to be reworked. As it stands, many believe 5G investment in Europe will lag, compared to other developed markets.

Consolidation now seems inevitable in the U.S. telecom and content markets, but the U.S. market will not be alone. India’s mobile market seems to be on pace to reduce the number of national competitors roughly in half.

And Bell Labs predicts a massive consolidation of the world’s telecom service providers by about 2025.

Consolidation within any given segment of the market is designed to build scale, which boosts revenue and reduces costs. Part of the reason revenue gets a boost is that competition is reduced.

From an antitrust or competition review, it therefore matters how an agency defines “the market.” And we may be at one of those points where some amount of consolidation will be needed to create the cross-industry capabilities survivors will need.

That, in turn, means greater market power in one segment might be a necessary building block for survival in a new market that combines industry segments. In other words, less competition in one segment might be necessary to create the bundled or cross-segment capabilities survivors will require.

Consider the asymmetrical U.S. market positions. Verizon, AT&T, Comcast and Charter have fixed network assets expected to provide backhaul advantages when small cells underpin mobile network capabilities. Sprint and T-Mobile US do not have such assets, which arguably puts them at a disadvantage.

Verizon, AT&T and Comcast have content assets. Sprint and T-Mobile US do not have such assets. Dish Network owns spectrum, but no network and no content assets.

If you assume the future requires competitors that combine access assets (mobile and fixed) with “up the stack” revenue sources, then “less competition” in either fixed or mobile segments of the business, and fewer independent suppliers of content and apps, is going to happen.

So much will hinge on how antitrust officials define the relevant “market,” for purposes of determining competitive impact. By definition, consolidation reduces the number of competitors, and therefore has implications for competition.

But competition in telecom markets might also be heading for a period where ownership of several types of assets (fixed and mobile networks, content and application assets) is necessary for survival.

Much depends on how one views the coming market, and what winners will possess, in terms of assets and capabilities. That, in turn, will affect the definition of the “market,” and what consolidation means for competition in that market.

IoT Already is Driving Connection Growth

The attraction of 5G includes its projected importance as a driver of new internet of things connections. That trend (internet of things connections are a driver of new accounts) already has started.

Growth in the total number of mobile subscriptions was driven by a 14.2 percent increase in the number of machine-to-machine (M2M) connections in 2016, to 7.6 million in the U.K. market, says Ofcom.

source: Ofcom

That is crucial if one considers the chances 5G will drive significant additional revenue on the part of human users.

The problem is that consumers or businesses will only spend so much on all communications services. In the United Kingdom, for example, since 2011, household spending on fixed network voice and mobile voice has dropped.

Spending on fixed internet access services has grown, in large part because more consumers are paying incrementally more for faster speed services that cost more. Faster speed networks both are a response to higher usage, and arguably drive higher usage.

But there are limits to how much a human is willing to spend on access, or various communications and entertainment services. Generally speaking, consumers have substituted one product for another, even if there has arguably been growth in the monthly percent of household income spent on communications.

The point is that, even in the 5G, there are tough limits on how much incremental spending consumers are likely to entertain.

source: Ofcom

source: Ofcom

That is why internet of things and machine-to-machine connections are viewed as so significant: such connections represent a way to grow new accounts without pushing up against consumer spending resistance. Most IoT connections will be purchased by enterprises who have many other value drivers, against which the new connection cost is evaluated.

What are Prospects for Higher Mobile Data Spending on 5G Networks?

Here, in a nutshell, is the challenge for 5G networks, where it comes to the amount of incremental access revenue service providers can earn: consumers or businesses will only spend so much on all communications services. In the United Kingdom, for example, since 2011, household spending on fixed network voice and mobile voice has dropped.

Spending on fixed internet access services has grown, in large part because more consumers are paying incrementally more for faster speed services that cost more. Faster speed networks both are a response to higher usage, and arguably drive higher usage.

As a result, average revenue per gigabyte consumed is falling. “While average broadband revenue per connection has been increasing year on year, the average revenue per GB has been falling; from almost £1 per GB in 2011, to £0.15 in 2016 (a negative 5-year CAGR of 31%), Ofcom notes.

That is essentially the pattern seen in the capacity business, where volume increases do not keep linear pace with revenues earned supplying capacity. At the same time, big app providers increasingly build and operate their own networks, removing much of the demand from the potential capacity market.

source: Ofcom

source: Ofcom

Firms Now Must Look for Growth Across the Ecosystem

As it consolidates horizontally, the telecom industry (access service providers of all sorts) also  has no choice but to look elsewhere within the internet ecosystem for growth, as “elsewhere” is where long-term growth is to be found.

That is not to downplay the near-term contributions greater scale will make. In the near term, firms will merge to create greater scale. But consolidation will not be enough, over the long term.

“It is no longer appropriate to develop corporate strategies, or to assess policy situations, with a narrow focus on a single segment of the value chain, A.T. Kearney analysts have argued.

For access providers (telcos, cable TV, satellite access providers and other internet service providers), that means looking beyond access services for growth (“up the stack,” mostly).

The reason is that value within the ecosystem  is shifting, while participants increasingly are moving into adjacent or other parts of the ecosystem, perhaps nowhere as extensively as in the apps space.

“As players such as Apple, Facebook, and Baidu expand into adjacent segments, their rationale is based on leveraging scale and integrating services and features into their core products and platforms to create barriers to entry,” A.T. Kearney analysts note.

By 2020, perhaps 52 percent of value will lie in applications, while just seven percent lies in internet access. In other words, between 2015 and 2020, the value contribution of internet access will drop 50 percent, as a percentage of total, even if gross revenues climb in many developing markets.

Will early deployment of 5G networks produce gains, and if so, for whom? Some argue that “value” ultimately drives results. If so, then it already is clear that about half  of value within the internet ecosystem, as expressed in revenue, lies in applications, about 14 percent in internet access.

source: AT Kearney

source: AT Kearney

So think about 5G. Will early deployment of 5G networks produce gains, and if so, for whom?

Ignoring for the moment broader answers, such as “users, society, the economy were the winners,” and looking only at the “telecom” part of the ecosystem, one might argue 3G was one thing, and 4G another, so 5G might not produce winners where one expects to find them.

The winners might be found disproportionately in the applications or device segments of the  business, and less in the network infrastructure or service provider parts of the business, for example, and for different firms in each era.

Roughly speaking, one can argue that 3G produced the biggest winners in the network infrastructure and handset segments of the business, mixed results in the service provider part of the business, and important new inroads by application providers.

One problem is that it is not clear there has been any single killer app, killer use case or killer capability that clearly defines the 3G and 4G eras.

For example, if you had to name a single “killer app” for 3G, what would that be? Some would say there was no killer app for 3G.

So some would say it was “mobile broadband ” or “mobile internet access” was the key advance beyond 2G. And many hoped-for new applications did not materialize in 3G, and arguably only became common features in the 4G era (think video calling).

In fact, some might say text messaging (first introduced by 2G networks) that became something of a killer capability for 3G, even if the 3G network did not introduce it.

Others might say the best example of a killer app was  mobile email (think BlackBerry). In fact, it arguably was the rise and fall of that killer app in the 4G era that lead to the demise of Research in Motion (BlackBerry) as a lead force in the devices portion of the ecosystem.

That might lead some to argue it was the “easy to use smartphone” (think Apple iPhone) that suggests the killer feature of 4G networks, or social networking, or multimedia social networking.

Likewise, the killer app for 4G is similarly elusive. Some might argue it was tethering (internet access) that was a killer use case. And it might well turn out that it is entertainment video that ultimately becomes the killer app for 4G.

Right now, we can only guess at whether a 5G killer app, feature, use case, capability or business model might actually emerge. There are two areas where supporters currently believe such developments could occur: internet of things and full substitution for fixed network internet access.

And there is the worrisome 3G precedent: the hoped-for innovation in value and revenue really did not happen until 4G. So it is unfortunately possible that 5G will be more like 3G than 2G or 4G: producing less than hoped for innovation in new services or revenue.

Or, perhaps more accurately, might 5G produce less new revenue than older revenue streams are cannibalized? At a very high level, voice revenue is being cannibalized by mobile data revenue because better mobile internet access means substitute products are available.

The safest bets right now are that internet application providers are going to win, as well as some handset suppliers. Some infrastructure suppliers will benefit, for a while. But it is not so clear that all service providers will win, or will win to the same degree. In fact, there always is the precedent of 3G.

Though the problem with 3G in some markets was operator overpaying for spectrum, and though that is not likely to happen in the 5G era, the business model could still emerge as a big issue.

So if it is Not the Wi-Fi, Might it Also Not be the Access?

Local access gets blamed for all sorts of problems that could come from devices, signaling, server latency, core networks or far-end access, not to mention normal core networ congestion. If Wi-Fi sometimes is not the experience bottleneck, maybe the same is true for mobile or fixed network access.

https://networkingnerd.net/2017/08/04/its-probably-not-the-wi-fi/

Verizon LAA Test shows 953 Mbps 4G Downlink Speed

Why do mobile service providers want to use Licensed Assisted Access (LAA), aggregating mobile spectrum with unlicensed spectrum? Because doing so allows higher speeds.

In what Verizon calls “a U.S. wireless industry first,” Verizon, Ericsson, and Qualcomm Technologies achieved 953 Mbps downlink  speeds on a commercial 4G network in Boca Raton, Fla.

The demonstration used all commercially available Verizon network components including a cell site, hardware, software, and backhaul. Riding on the backbone of Verizon's most reliable network infrastructure, while Ericsson provided an advanced remote radio head in the industry.

The micro Radio 2205 for LAA, designed for unlicensed spectrum use, provides small dimensions, flexible mounting and superior performance, and is a component of the Ericsson Radio System, an end-to-end modular radio network portfolio of hardware and software designed to fit all site types and traffic scenarios as networks grow in scale and complexity on the road to 5G.

Qualcomm Technologies provided a Qualcomm® Snapdragon™ 835 mobile platform test device, with Gigabit LTE capability thanks to the integrated Snapdragon X16 LTE modem.

Inevitably, as near-gigabit speeds are deployed on 4G, some are going to start complaining about “fake 5G.” For human users, for typical applications, it will not matter, no matter what we call it.

There will be some apps that will benefit from 5G lower latency, but most 4G users likely will not much notice the difference between 4G and 5G latency in normal daily use.

The same sorts of complaints were raised when 4G first was introduced. There was the issue of whether WiMAX was really 4G, for example. I used it. So did lots of other people. We just wanted faster speeds. We couldn’t really have cared much which “G” we were using.

Is it Counter-productive to Try to Create Value by "Unlimited Usage" Plans?

As veterans of the computing industry will willingly attest, it is quite difficult to differentiate on the basis of “feeds and speeds.” Advantage, when it can be gained, is rarely long lasting, since all contestants have access to the same fundamental technology.

On the other hand, where different platforms contest, advantage can be more significant. The best example is internet access supplied by hybrid fiber coax or DSL, or HFC and fiber to the home. In the former case, cable simply is “better.” In the latter case, “quality” is not the case, so much as the business case.

From time to time, one mobile supplier or another can claim advantage, either in terms of geographic coverage, or spectrum assets (capacity), or even air interface. All those differences can lead to quantitative advantages for some time.

“Unlimited usage,” though, is proving to be a case where “speeds and feeds” do not seem to offer sustainable advantage.

To be sure, in 2012, when T-Mobile US made unlimited a key pillar of its Un-carrier strategy, the move triggered a massive surge of market share for T-Mobile US. Sprint also had an unlimited usage plan.

Then Verizon and AT&T were  forced to react. The problem is that any claim of “unique value” becomes harder to demonstrate when all the suppliers offer the feature. Marketing advantage was fleeting.

Not surprisingly, “unlimited usage” encourages customers to use more data, which is the corollary of this method of boosting value.

And that means the effort to boost value this way is problematic. As usage grows, carriers eventually have to add more capacity. That means higher capital investment. So unlimited use ceases to be a meaningful differentiator, but results in higher capex requirements and higher operating costs.

Also, not paradoxically, the effort to provide “value” in the form of “unlimited usage” ultimately is muted, but in turn increases costs. Also, end user experience arguably falls, providing less value.

According to OpenSignal, over the last six months, overall 4G speeds for Verizon and AT&T have dropped.

The impact of unlimited was particularly evident for Verizon, which saw its average LTE download connection fall 12 percent, from 16.9 Mbps to 14.9 Mbps.

AT&T's decline was less pronounced, at 12.9 Mbps, down from 13.9 Mbps. OpenSignal says it has recorded steady decreases in average 4G speed each month for both operators since they unveiled their unlimited plans in February.

The most likely and obvious explanation for slower speeds is higher congestion caused by more customers using more data.

Competing on speeds and feeds remains problematic.