"Insight" is the Outcome AI Delivers

All of us have heard the phrases “data-driven business” and “digital transformation” as hallmarks of the way firms will have to evolve

Add insights-driven to that list. Though we are in the early days, that phrase is supposed to refer to the way firms mine the data they own to develop insights about customer behavior that can, in turn, be used to drive sales, retention and profit margins.

“Insight” is another way of saying “knowledge” or “understanding” about actual patterns in customer and prospect behavior, with the ability to apply such understanding to actual product features, processes and delivery, in a predictive way.

And without belaboring the point, such insights, the result of data mining using artificial intelligence or machine learning, already have been deployed in some business processes such as customized content, search, customer service operations and e-commerce.

Some firms have ad advantage, though. Etsy, the e-commerce site, created a “dedicated research department to blend quantitative and qualitative insight and embed customer insights into every department, leading to high levels of user satisfaction and smarter product decisions,” says  Brian Hopkins, Forrester VP.  “Insights-driven businesses not only excel at data analytics, but also bring quantitative insight to bear on problems then embed insights in their business models, operations, and company culture.”

Tesla auto performance data likewise is streamed in real-time to Tesla’s data scientists, who build models to help diagnose driving issues and provide software or firmware updates over the air.

One Interesting Factoid from Verizon's 3Q 2017 Report

Just one interesting observation from Verizon’s third quarter earnings report, which probably was better than most had expected. Note just one indicator, voice connections, which shrank seven percent. At that rate, Verizon loses half its voice revenue in a decade.

That is one illustration of the argument that tier-one service providers must replace half their current revenue every decade.

Despite the shift to unlimited plans and heightened competition in the mobile services market, Verizon managed to add a net 603,000 mobile connections, 486,000 of those being the highly-regarded postpaid accounts.

Operating revenues also were up, year over year. Even Verizon’s wireless segment posted higher revenue, year over year.

source: Verizon

Massive MIMO Deployments are Inevitable

It is not hard to predict that use of massive multiple input-multiple output radio technologies is going to grow, as advanced 4G and 5G networks are built. Massive MIMO is required to make use of vast new spectrum resources to be released in the millimeter wave region to support 5G.

In fact, massive MIMO is intrinsically related to use of small cells, ultra-dense cell networks and millimeter wave frequencies.

Massive MIMO trials or limited deployments in 2017 were undertaken by Sprint, Deutsche Telekom, China Mobile, China Telecom, China Unicom, Singtel, T-Mobile Netherlands, Vodafone Australia, Optus, and Telefónica. Massive MIMO also is being developed by Telecom Infra, the open source telecom infrastructure effort.

The spectrum bands at which many of these trials have taken place include 2.5 GHz, 2.6 GHz, 3.5 GHz, 1.8 GHz, and 2.3 GHz. Except for 3.5 GHz, the remaining frequencies are also allocated for LTE in many countries. Telecom Infra is testing much-higher frequencies (60 GHz), designed in the U.S. market to use unlicensed spectrum.

source: International Institute of Technology

MIMO antenna technology has been in use since the launch of 802.11n WiFi systems, but was first ratified for use in cellular systems in 3GPP’s Release 7 in 2008.

Deployments below 1 GHz are most likely to support eight or 16 antenna elements at most. Very-high frequencies above 30 GHz can have hundreds of antenna elements with some research citing below 500 antennas as an upper limit.

Why a Massive New Gigabit Upgrade, Instead of DirecTV Acquisition, Made No Sense

Two years ago, when DirecTV was acquired by AT&T, it would have been easy to find detractors arguing that AT&T should have spent that money investing in fiber to home infrastructure. With linear video cord cutting possibly accelerating, the new version of that story is being heard again.

So what should AT&T have done with $67 billion, assuming a 4.6 percent cost of capital? Cost of capital is the annualized return a borrower or equity issuer (paying a dividend) incurs simply to cover the cost of borrowing.

In AT&T’s case, the breakeven rate is 4.6 percent, which is the cost of borrowing itself. To earn an actual return, AT&T has to generate new revenue above 4.6 percent.

First of all, AT&T would not have borrowed $67 billion if it needed to add about three million new fiber to home locations per year. Assume that was all incremental capital, above and beyond what AT&T normally spends for new and rehab access facilities.

Assume that for logistical reasons, AT&T really can only build about three million locations each year, gets a 25-percent initial take rate, spends $700 to pass a location and then $500 to activate a customer location. Assume account revenue is $80 a month.

AT&T would spend about $2.1 billion to build three million new FTTH locations. At a 25-percent initial take rate, AT&T spends about $525 million to provide service to new accounts. So annual cost is about $2.65 billion, to earn about $720 million in new revenue (not all of which is incremental, as some of the new FTTH customers are upgrading from DSL).

The simple point is that building three million new FTTH locations per year, and selling $80 in services to a quarter of those locations, immediately,  does not recover the cost of capital.

The DirecTV acquisition, on the other hand, boosted AT&T cash flow about 40 percent.

Basically, even if AT&T had not purchased DirecTV, and began a new program adding three million new gigabit passings per year, those investments would not increase AT&T cash flow in the near term, and possibly never would do so.

The same logic applies to the Time Warner acquisition, which not only moves AT&T into new segments of the content ecosystem, but also boosts cash flow and profit margins.

But the linear video business is declining, many obviously will note. All true. But linear assets create the foundation for over-the-top assets, which also come with lower operating cost (much lower fulfillment and provisioning, for example).

Also, no matter what the long-term impact might be, a huge boost in free cash flow still matters, as markets evolve.

The point is that the alternative of plowing capital into faster gigabit upgrades sounds reasonable, but simply fails to move the needle on cash flow.

SD-WAN Growing 70% Annually, MPLS 4%

Only one fact about software-defined wide area network services is incontestable: its growth rates dwarf  growth rates for MPLS, a service some believe eventually could emerge as a replacement for some portion of MPLS demand.

A new forecast from International Data Corporation estimates that worldwide SD-WAN infrastructure and services revenues will see a compound annual growth rate of 69.6 percent and reach $8.05 billion in 2021.

MPLS, on the other hand, will grow at about four percent rates through 2021.

source: Ovum

The most significant driver of SD-WAN growth over the next five years will be driven by increased reliance on cloud computing, big data analytics, mobility, and social business, IDC says.

Use of those tools generally increases network workloads and elevates the network's end-to-end importance to business operations, including support at all branch locations.

Which Way for Retail Internet Access Pricing?

We are about to see an unusual test of internet access pricing; unusual only in the sense that the direction of retail pricing in the internet era has been down, in a cost per bit basis and generally even in an absolute cost basis.

The test is a thesis some advance that U.S. cable companies--especially Comcast--will be able to boost retail internet access prices dramatically in coming years. That would run counter to past trends, and assumes that competition in internet access space will not increase.

Prices are complicated though, as one broad pattern has been for prices to remain roughly flat while speeds have grown dramatically, in some cases as fast as Moore’s Law might predict, at the high end of the market (what it is possible for a consumer customer to buy from an internet service provider such as Comcast).

That means sharp declines in cost per megabyte per second of speed might not be seen in posted retail prices. Also, pricing trends also reflect consumer decisions to spend more for their access, in the form of tiers of service that are faster.  

Still, there is much anecdotal evidence prices are dropping, in developing and developed markets, including prices as a percentage of gross national income per capita.

According to the International Telecommunications Union, broadband prices have declined as much as 50 percent in developing nations, between 2008 and 2010, for example, and about 35 percent in developed nations.

source: ITU

source: ITU

Granted, as a supplier, Comcast might “need” to raise prices to counter lost video revenues.

That effort would aim to sustain average revenue per account as the linear video business declines.

But supplier “need for higher prices”  always must contend with market dynamics. And there, one might well question whether Comcast will be able to maintain pricing power. Not only will mobile alternatives become more reasonable in the 5G era, new suppliers are entering the market (both new retail providers, such as Google Fiber, Ting Internet and others, as well as enterprises building their own networks and removing demand from the market).

So the interesting test is whether Comcast and cable can maintain pricing based on market power, in the 5G era, or whether competition will escalate, diminishing both market power and the ability to raise prices.

Netflix, AT&T, Comcast: Same Strategy?

Netflix strategy has been clear for some time: “Become HBO faster than HBO becomes us.”

By that, Netflix means becomes a source of original programing, not a retransmission or distribution vehicle for third party content.

Not just incidentally, the Netflix strategy sheds light on what AT&T and Comcast have done, despite criticisms of AT&T for doing so. Netflix occupies what formerly were a few distinct roles in the video entertainment ecosystem: content owner, program network and content distributor.

TV Channels of the Future - AtticTV Pte Ltd from Johnson Goh

In the old model, programming networks were one segment of the business, while distributors (broadcast TV, cable TV, telco and satellite TV) were in a distinctly-different part of the ecosystem. The content creation business (studio function) was a third role.

But what Netflix has done is create a new position that simultaneously combines those several former roles.

Its investments in original programing make it a content owner, like a studio. Its distribution function (streaming) makes it a distributor. But its total content assets also make it a programming network.

“Our future largely lies in exclusive original content,” says Reed Hastings, Netflix CEO. “Our investment in Netflix originals is over a quarter of our total P&L content budget in 2017 and will continue to grow.”

Netflix already has $17 billion in content commitments “over the next several years” and a growing library of owned content ($2.5 billion net book value at the end of the quarter).

Netflix expects to spend $7 billion to $8 billion on content in 2018.

“Just as we moved from second-run content to licensed originals and then to Netflix-produced originals, we are progressing even further up the value chain to work directly with talented content creators,” Hastings says.

In other words, Netflix, aside from being a content network and a content distributor, now is moving in the direction of becoming a content owner and developer, like a studio.

By buying Time Warner, AT&T is using the same strategy, moving from one role to several: distribution to content creation; distribution to content network.