How Will CBRS Market Develop?

Will new access capacity (Citizens Broadband Radio Service; use of unlicensed and shared spectrum) allow new entities to compete with mobile operators in the access services business? Some think so.

Rethink Technology, for example, has argued that shared spectrum will trigger new “challengers” to mobile operator revenue models.

Others might point to decades-ago arguments about Wi-Fi replacing mobile networks and conclude that new shared and unlicensed spectrum likely will create new use cases and marginally affect wide area network access providers.

But the development of Wi-Fi, if a valid indicator of what could happen, suggests complementary use cases more than substitution.

source: Rethink Technology Research

Caroline Gabriel, director of research at Rethink Technology Research, believes that “enterprise small cells, particularly those operating in unlicensed spectrum, could be the undoing of mobile network operators, relegating them to ‘utility’ commoditization, and falling revenues, as both license free spectrum and shared spectrum ideas, are taken up aggressively by newcomers.”

“Small cells were conceived as a way to improve the mobile operator business model, but they may now become weapons for challengers to MNOs, particularly broadband players with established backhaul such as cable operators,” she says.

Without question, use of unlicensed or shared spectrum to create connectivity services can affect the business model of some access service providers.

Service providers with a huge network footprint (cable TV operators being the best example), can use Wi-Fi access to reduce the amount of capacity they buy from their wholesale providers, when operating as mobile service providers. So, without question, unlicensed and shared spectrum will have business consequences for some competitors.

Independent wireless ISPs might also be able to leverage new shared and unlicensed spectrum.

In that sense, yes, new shared spectrum and unlicensed spectrum can--and will--be used by telco competitors, as well as by telcos themselves.

A related question is whether use of unlicensed or shared spectrum by large enterprises actually displaces access that otherwise would have been purchased from a mobile service provider.

That could be relevant in terms of internet of things deployments, where an enterprise might build its own local network to collect data from sensors, rather than using services from a mobile service provider, instead.

Rethink estimates that, by 2022, enterprises will account for almost half of all small cell deployments, up from seven percent in 2014. The installed base will reach 14.8 million in 2022, up from 185,000 in 2014.

The issue is why enterprises will be deploying, what the use cases are, and how such deployments could affect service provider revenue.

Here one must look to history.

Substitution of this type (private networks for public networks) has been talked about for decades. Wi-Fi provides the example. Back in the late 1990s and early 2000s, one could hear some talk of the theory that Wi-Fi eventually would emerge as a full access substitute for mobile network access.

That mostly happened in the early 3G era.

Conversely, perhaps some might argue that new mobile networks will obviate the need for Wi-Fi. That almost assuredly goes too far, but even Cisco’s forecasts waffle on this matter.

A 2015 forecast by Cisco suggested use of Wi-Fi would not decrease, as a percentage of total access. Later forecasts suggest 5G will increase the amount of access on the mobile network, reversing a trend in place since 2G.

source: Cisco

One potentially useful analogy is the traditional use cases for private, indoor networks (local area networks and Wi-Fi) and outdoor mobile and fixed networks. One can argue that the traditional bifurcation between public “access” networks and private enterprise networks still provides a likely model.

Wi-Fi essentially is the platform that replaced cabled private premises networks. Public carriers earned their revenue bringing connectivity to the premises, but enterprises and organizations and built their own internal distribution networks.

Rethink believes CBRS will therefore enable replacement of mobile services by enterprise owners building private networks. That could happen, in the sense of enterprises substituting private network access for public network sensor access.

But that would limit new public network IoT connections, not displace existing mobile connections. There would be a revenue impact, but of an indirect sort: eliminating one potential source of new mobile network connectivity revenues.

The analogy is not perfect, but the bifurcation between private local area networks and wide area public networks is germane. That is not to deny the emergence of “neutral host” providers selling wholesale premises access to all mobile service providers.

But, in such cases, the neutral host providers essentially are mobile infrastructure providers working in partnership with their mobile clients, as do tower companies.

We will wait to see how the business models develop, but LANs and tower company precedents, as well as services such as Boingo, provide some prior examples of how the new CBRS and related markets could develop.

U.S. Internet Access: What Would it Take for AT&T, Verizon to Take 10 Market Share Points?

The largest U.S. cable TV companies have 64 percent share of internet access accounts in the United States, according to the latest data from Leichtman Research Group. But there also is an 80/20 rule at work: the firms that drive most of the activity are Comcast and Charter; AT&T and Verizon.

Charter and Comcast have 81 percent of the cable internet customers. AT&T and Verizon have 67 percent of the telco internet access customers.

Between them, Charter and Comcast got 93 percent of the net account additions in the cable TV internet access provider segment. And while AT&T gained marginally, while Verizon lost marginally, nearly all the telco ISP losses came from CenturyLink and Frontier Communications.

In other words, though cable ISPs continue to get virtually all the net gains in accounts, AT&T and Verizon are roughly flat, in terms of subscriber installed base, while it is the rural operations that are losing share to cable rivals.

There might be some larger implications. Assume Verizon and AT&T get about 40 percent share in their markets, with cable getting 60 percent. No matter what they do, how easy will it be for AT&T and Verizon to nudge up to about 50 percent share? And how could they do so?

Basically, AT&T and Verizon likely would have to be able to match cable speeds and product features, as well as offer lower prices cable refuses to match, or otherwise change the value-price bundle in some other way relevant for consumers.

Ratcheting up speeds to match cable likely is the less difficult precondition, as costly as network upgrades might be.

Gaining a sustainable pricing advantage over cable is more difficult, as AT&T and Verizon cannot control the cable reaction. And it is by no means clear that  cable competitors would accept lower market share to protect their profit margins.

Leaving those issues aside for the moment, assume that AT&T and Verizon were able, somehow, to grab 10 points of market share, in part by upgrading to gigabit speeds, with a path to 10 Gbps.

The upside from such an upgrade is about 10 points of market share in internet access. What is a point of share in the consumer market worth?

Assume an internet access account taken from a cable supplier represents about $50 a month in revenue, or an annual $600 worth of gross revenue. If so, one percent of share gain is about 945,322 accounts in the overall market.

The issue is that none of those firms operates fully nationwide, and do not compete solely with the other two firms (Comcast and Charter on one hand, AT&T and Verizon on the other).

But as a simplifying assumption, assume AT&T, Verizon, Charter and Comcast collectively represent about 72 million accounts, and that the share changes would happen only across that 72 million installed base.

In that case, one percent of share change represents 720,000 accounts. Also, since the market is a zero-sum gain, five percent of gain by telcos means five percent loss for cable, for a total net swing of 10 percent, and a new share structure with cable at 55 percent and telcos at 45 percent.

That suggests, broadly, the the upside for AT&T and Verizon, to gain five percent share of the installed base, is really about 3.6 million accounts. At $600 for each account, annually, that implies something on the order of $2.16 billion in incremental revenue for AT&T and Verizon, with AT&T gaining about 69 percent of that.

The implications of a full 10-point change in market share, resulting in a 50-50 split of the market, is $4.3 billion in annual revenue and net swing of 7.2 million accounts,  again assuming that AT&T/Verizon only face Comcast/Charter in their markets.

As a practical matter, the potential for installed base share change between those four firms likely is less than that, since none of the four firms actually faces a zero-sum situation across the cable-telco industry segment divide.

The point is that the revenue upside for internet access gains arguably is less than $3 billion in annual revenue for AT&T, some $1.3 billion for Verizon, if AT&T and Verizon were able to take half the internet access share in their fixed network markets.

Compare that to the cost of upgrading 18 million passings to get those 7.2 million new accounts. Recall that both AT&T and Verizon presently have customers on about 40 percent of passings. So it is necessary to upgrade all passings to capture half the new customers.

At $700 per passing, that implies a network investment of about $12.6 billion, plus activated account investment of perhaps another $2.1 billion, or about $14.7 billion total. Marketing or customer acquisition costs would be incurred as well.

Such customer acquisition costs can run about $2000 per new account, including direct marketing costs and the cost of promotional pricing and incentives. That could add another $14.4 billion in operating costs, for a total of $29 billion.

You might consider that a reasonable bet (spending $29 billion to harvest $4.3 billion in additional revenue). But you also can see why AT&T and Verizon are hopeful about 5G-based fixed wireless access, which might offer capital investment about half what fiber to the home costs.

ISPs	Subscribers, 3Q 2017	Net Adds, 3Q 2017
Cable Companies
Comcast	25,519,000	213,000
Charter	23,603,000	285,000
Altice	4,020,900	16,500
Mediacom	1,194,000	9,000
WOW (WideOpenWest)	730,000	2,400
Cable ONE*	519,062	(2,662)
Other Major Private Company**	4,860,000	15,000
Total Top Cable	60,445,962	538,238
AT&T	15,715,000	29,000
Verizon	6,978,000	(10,000)
CenturyLink	5,767,000	(101,000)
Frontier	4,000,000	(63,000)
Windstream	1,017,400	(8,400)
Cincinnati Bell	307,900	800
FairPoint^	301,000	(3,193)
Total Top Telco	34,086,300	(155,793)
Total Top Broadband	94,532,262	382,445

source: Leichtman Research

Video Entertainment: Slim to Zero Profits

For most tier-one service providers, video entertainment has lower profit margins than internet access or voice. The issue is how much lower. Gross margins for internet access might be in the range of 20 percent for video, 40 percent for internet access. Net margins for video might be in single digits.

For smaller service providers, video entertainment is a money-loser.


source: Geobrava

For Metronet, an overbuilder operating in Indiana and Illinois, it is literally the case that video entertainment is a “zero margin” service; a feature of a triple-play service, not a direct revenue driver.

Using what it calls a pass-thru pricing regime, Metronet says it makes video entertainment available at exactly what Metronet pays its content providers.

Under that “pass thru pricing” program, consumers are billed exactly what we pay for the television networks in your package,” Metronet says.

That means no mark-up from the actual cost of goods. “We promise that you'll pay exactly what we pay for the networks in your television lineup,” Metronet says.

In other words, video entertainment literally is a feature of the triple-play package, not a revenue generator.

What Will Drive 5G Business Model?

Among the many unknowns about 5G is the business model: where will new incremental revenue sources develop, and will they develop?

The conventional wisdom is that “enhanced” mobile broadband is one of three key revenue drivers. The others are ultra-low latency services (connected cars, for example) and massive machine applications (internet of things).

If that proves to be true, then it also is possible to say that two out of three expected revenue drivers will be enterprise markets (low latency and machine applications), while one will represent consumer mobile broadband.

And, at least at first, consumer internet access is likely to drive incremental revenue growth. The value proposition (10 times faster) is clear, and the market is large (everybody) and well understood (internet access).

And while consumer internet access will continue to be a “horizontal” value (everybody needs internet access), that might not be the case for the other two drivers. It is logical that success providing low-latency services or machine applications could involve a healthy amount of industry vertical knowledge.

That would be a major evolution for telecom service providers, who arguably have done best supplying horizontal value in the ecosystem.

That noted, service providers are not strangers to specialized enterprise communications, to an extent. Generations of enterprise-specific data networks have been developed and deployed. Perhaps few of those efforts have had the requirements for intimate industry vertical knowledge, however.

That would represent one of several huge shifts. First, growth might change from consumer mobile broadband to growth lead by enterprises deploying huge sensor networks and new use cases where low latency is a fundamental requirement.

Growth might also shift to “vertical” from “horizontal.” That will require additional investment and focus from an industry used to horizontal value propositions, at least in some cases. It also is true to note that there are potentially so many vertical use cases that a rational service provider cannot actually customize for all of them.

That potentially means a shift away from “public networks” and towards “private networks,” as many potential customers decide they must build their own networks, to support their specific use cases. Just how far that goes is unclear.

To illustrate, it is conceivable that, by the end of the 5G era, Amazon is the service provider, not NTT or AT&T, in many use cases. What will matter is whether such providers are substantial wholesale customers, or build and operate their own facilities. If so, the extent to which they do so will affect public services markets.

Also, new network capabilities, such as network slicing, might just be enough to allow service providers to build customized private networks on behalf of customers, to a large extent.

The issue is the amount of uncertainty about 5G business models, not because of anything inherent in 5G, but simply because, over the last few decades, service providers have had to replace about half their current revenue every decade.

Mobility replaced lost fixed network long distance revenue Some service providers used business customer revenue to replace lost consumer revenue.

Cable operators replaced consumer revenue with business customer revenue, voice and data for video revenue.

Mobile operators replaced declining voice and text messaging revenue with mobile internet access.

To be sure, every next generation mobile network has represented some degree of uncertainty, in terms of enabling the growth of new revenue streams and use cases. That will be true for 5G as well.

What seems arguably certain is that legacy use cases will not drive growth. One might argue that never has happened with mobile platforms. Though digital 2G was more efficient than analog, the new revenue came from text messaging and affordability by mass market customers, which drove subscription growth.

The 3G network was the first to support mobile email and web browsing, as well as some amount of tethering and mobile internet access. The 4G network was the first to enable video content consumption and a user experience better than Wi-Fi.

The 5G network is expected to enable internet of things and machine to machine business models, as well as full substitution for the fixed network (internet access).

More 5G Spectrum Coming from U.S. FCC

The Federal Communications Commission will vote in November 2017 to make available 1,700 MHz of high-frequency spectrum for 5G.

Two spectrum bands will be allocated,  providing 700 MHz in the 24 GHz band and 1 GHz in the 47 GHz band.

A year ago, the FCC allocated 11.65 GHz of spectrum with 3.85 GHz of that allocated in the 28 GHz and 37 GHz to 40 GHz bands.  Additional spectrum is still under consideration to be allocated in the future.

All that new spectrum, plus spectrum sharing and spectrum aggregation, will lead to mobile internet access becoming very price-competitive with fixed internet access, for many users and use cases.

Some might still doubt that 5G will create, for the first time, full product substitution by mobile networks for fixed network internet access. Traditionally, the objections were well founded, and based on value and price objections.

Mobile traditionally has been much slower than fixed, and cost per bit has been at least an order of magnitude higher for mobile alternatives.

source: Wavelengths

Of course, nothing stands still, where it comes to network platforms and technologies for internet access. Even before spectrum sharing, aggregation of licensed and unlicensed spectrum and new allocations of millimeter wave capacity, each mobile broadband network generation has reduced cost per bit by about 50 percent.

So there is little reason to believe 5G will be different. To wit, a reasonable person would forecast that cost per bit for mobile internet access will drop at least another 50 percent.

To be sure, mobile bandwidth, on a cost-per-bit basis, remains an order of magnitude or so more expensive than fixed alternatives.

Of course, that comparison has been based solely on “mobile” versus “fixed” economics. In the next era of spectrum sharing and aggregation of licensed and unlicensed assets, “fixed” access becomes part of “mobile” access.

That logically should propel “mobile” access faster down the cost curve, as “mobile” access is based, in substantial part, on use of unlicensed (“no incremental cost”) assets.

When aggregating mobile access with unlicensed, the assumed cost of the unlicensed capacity is fairly close to zero, as there is no “cost of goods” (the unlicensed access is provided on a no-additional-charge basis).

A mobile service provider supplying a unit of access service to a device blends the cost of using its own network ($ per delivered gigabyte) with “no out of pocket cost” (close to zero dollars per gigabyte) unlicensed gigabytes.

If you assume the mobile network cost of delivering a gigabyte will drop 50 percent from 4G to 5G, an incremental drop will be added by shifting much usage to the Wi-Fi or other unlicensed spectrum networks.

The point is that the cost of using a gigabyte of “mobile” access will be quite close to the cost of using a gigabyte of “fixed” access, especially on an “actual consumption” basis.

Obviously, the actual cost of using any internet access service, no matter what the posted retail rate, is directly related to the actual amount of usage, compared to the retail recurring cost.

A user might pay for use of 10 Gbytes on a mobile network, at $2 to $8 per gigabyte, compared to a fixed network cost of perhaps five cents per gigabyte.

The out of pocket cost of the mobile access might be $30 a month, while the cost of the fixed access might be $60 a month. The new reality, though, is that the mobile cost will include use of an almost-unlimited amount of unlicensed network access.

That means the “actual” cost of a $30 a month mobile plan includes hundreds of gigabytes of effective usage. In that case, the cost per bit of mobile access is virtually indistinguishable from the cost per bit for fixed access.

Why Gigabit Mobile Matters

Though retail pricing is an issue, mobile network peak data rates above the gigabit-per-second barrier are important because it brings “a mobile user experience that at least matches the home fixed broadband experience,” according to Nokia.

In other words, the value is not so much “gigabit speeds for smartphones,” but the ability of mobile networks to rival fixed network user experience. That, in turn, matters for several reasons.

source: areppim.com

In markets where mobile provides nearly all the internet access, gigabit peak rates mean typical user experiences in developing markets that are substantially on a par with developed markets.

In developed markets, gigabit mobile rates mean both the ability to create a full substitute product for fixed access, as well as the ability to serve many locations where the business case for a fixed solution at such speeds is unworkable.

For fixed service providers, gigabit mobility therefore also calls into question the value and business model for the fixed network, which shifts away from retail consumer internet access, and towards backhaul and business customer revenue models.