Network Effects Explain Oligopolistic Structure of the Internet

source: medium.com

Oligopolies (functional, rather than enforced by law) now are a key characteristic of most parts of the internet ecosystem. In other words, there are functional "gatekeepers" across most of the ecosystem.

That "winner take all" structure might emerge as the natural consequence of consumer choices, supplier skill and timing.

The biggest driver, though, is that some markets have "network effect" characteristics. That is why the "platform" role is so desirable.

Platforms benefit from scale, and grow with increasing scale. That arguably applies for operating systems, access services, devices and apps/

So most markets with scale economics and network effects arguably develop in the same way.

The point is that markets where winners are able to exploit network effects virtually always leads to oligopoly outcomes. Regulators can break up such markets, but to the extent that network effects actually matter, concentration always will reoccur.

In the application space, advertising revenue is dominated by Google and Facebook, which claim 63 percent of U.S. digital ad revenue in 2017. In the operating system market, Android and Apple iOS are the leaders, with 99-percent market share. The device portion of the market is the least concentrated , although Apple and Samsung have earned most of the profits.  

Mobile and fixed network access markets likewise are oligopolies, in virtually every market. Fixed markets in many cases remain virtual monopolies, while mobile markets tend to be oligopolies.

source: eMarketer

Ericsson to Supply Verizon Early 5G Deployments

Ericsson will supply Verizon with 5G radio infrastructure, allowing Verizon to launch commercial “pre-5G” networks in 2018. The expected deployments will include the launch of fixed wireless services in a few U.S. cities.

That is important for several reasons. Although the creation of new apps, services and revenues is a hoped-for development for 5G, that expectation has existed for 3G and 4G as well, where service providers expected new use cases and apps  to develop, but were not sure precisely what would happen.

That remains the case for 5G as well, where the key issue is the business model: what incremental new revenue sources will develop?

Verizon, learning in part from history, is following a known deployment path. As 4G initially was launched in the first markets to support computing devices, not mobile voice, so Verizon will launch 5G as a platform for fixed wireless internet access, and later add the full mobility network functions. That allows a scaling of investment and matches early investment with revenue generation.

Use of 5G to support fixed wireless access, both in-territory and out of region, is among the first new revenue sources to develop for 5G. Deployment of fixed wireless out of Verizon’s existing fixed network region also is a first.

So one other way to characterize Verizon’s early 5G deployments is to note that the platform will enable an out-of-region assault on consumer markets, where Fios has been totally in-region.

More Fixed Network ISP Competition Seems to be Coming

The fixed network internet access duopoly possibly is going to be challenged in new ways over the coming decade. New forms of mobile competition are going to develop, including both direct mobile substitution and mobile-enabled fixed wireless. Also, some new fixed network competitors are likely to enter the markets as well.

At least in principle, more than 100 Colorado communities could see some form of

municipal broadband network created, as voters in those communities have approved such moves. That clears a legal hurdle, but now means each community will grapple with the business model.

Longmont, Colo. already has built out a portion of its planned gigabit internet access network, aided by that city’s ownership of a municipal power utility, meaning Longmont owns rights of way, distribution facilities, rolling stock and other assets helpful to creating a city-wide internet access network.

In Centennial, Colo., private internet service provider Ting Internet will piggyback on a new government network to be built by the city of Centennial itself.    

In a few cases, state funds could play a role, as subsidies for middle-mile trunking can change the business model. Magellan Advisors, for example, identifies several roles cities can take, including streamlining of processing necessary for private ISPs to build or upgrade infrastructure; providing access to city-owned dark fiber; city-owned wholesale capacity services or actual provisioning of municipal services for businesses or consumers.

Risk and capital investment grows assume more active roles, including that of actual service  provider. One point worth making is that adoption rates vary based on the number of services offered, and by the ways adoption is measured.

These days, in competitive consumer markets, penetration is measured in terms of revenue-generating units, not “locations” or “households.” Each unit sold (voice, video or internet access) is counted against the base of locations. So a single location buying three services results counts as much as three other homes buying just one service.

So it is that a number of retail service providers such as Morristown, Tenn.; Chattanooga, Tenn.; Bristol, Va. or Cedar Falls, Iowa seem to have far higher penetration rates than Longmont, Colo.

That is partly because the Longmont network still is being built out, but also reflects the fact that Longmont’s network sells only internet access and voice, but not video entertainment services. The other networks have been in operation and marketing for three times as many years as Longmont.

source: Magellan Advisors

Customer “penetration” by household therefore is different from penetration measured as a function of units sold. The difference is that determining the magnitude of stranded assets hinges on how many locations passed generate revenue.

Assume that, on average, a typical household buys 66 percent of the total suite of services (two of three triple play services or  three of five services, for example).

The difference is significant. Measuring “penetration” by units sold, penetration appears to be as high as 76 percent to 87 percent. Measured as a function of homes generating revenue, penetration could be as low as nine percent, or as high as 44 percent, with a “typical” value being something between 20 percent to 25 percent of homes passed.

Penetration: Units Sold or Homes Buying Service?
	Morristown	Chattanooga	Bristol	Cedar Falls	Longmont
homes passed	14500	140000	16800	15000	4000
subscribers	5600	70000	12700	13000	500
units sold	39%	50%	76%	87%	13%
services sold	3	3	5	3	2
HH buys .66 =	2	2	3	2	1
Homes served	2828	35354	3848	6566	379
penetration	20%	25%	23%	44%	9%

It might be worth pointing out that all these communities (Morristown, Chattanooga, Bristol, Cedar Falls and Longmont) have municipally-owned utility companies, and might therefore represent a sort of best case for retail operations serving consumers.

That seems consistent with other evidence. In markets where a telco and a cable operator are competent, as is the attacking ISP (municipal or private), market share might take a structure of 40-40-20 or so, possibly 50-30-20 in areas where the telco does not have the ability to invest in faster broadband and the cable operator has the largest share.

Beyond the actual cost of the network, and the business role chosen by the municipality, details of revenue generation (homes that generate revenue as a percentage of total; number of services offered) are fundamental.

Beyond that are the other operating and marketing costs, overhead and need for repaying borrowed funds and making interest payments, on the part of the retail service provider.

One might argue that most other communities, without the advantages ownership of an electric utility provides, will often find the lower risk of a shared public-private approach more appealing.

Also, some ISPs might find the availability of some amount of wholesale or shared infrastructure makes a meaningful difference in a business model.

One might suggest there are a couple of potential practical implications. Efforts by incumbent ISPs to raise retail prices in the same way that video entertainment prices have grown (far higher than the rate of overall inflation) will increase the odds new competitors enter a market.

Higher prices, in fact, will increase the likelihood of new entrants entering a market, as the higher prices increase the attractiveness of doing so.

In at least some cases, the new competitors will be firms such as Verizon, which now has announced it will essentially overbuild an AT&T and Comcast markets in Sacramento, Calif.

Though it is not easy, more competitive ISPs are likely to enter more markets, as lower-cost access platforms evolve, helped in some cases by municipal facilities support.

Where that happens, it is conceivable that the incumbents will see a new limitation on their market share, dipping from possibly 50-percent share to a maximum of perhaps 40 percent each, on a long-term basis, assuming the new competitor is not eventually bought out by one of the incumbents.

Some Want Faster Next Generation Network Investment, But Also Keeping Legacy Copper

source: Technology Futures

As much as most people would agree that robust supply of new next generation networks is a good thing for industry, consumers, government and education, as a practical matter many of those same constituencies oppose retiring legacy copper networks in favor of optical or other next-generation platforms.

It is not a new problem. Most consumers would say they want faster, more robust mobile networks with better coverage. But owners of real estate also frequently and normally oppose placement of the new tower sites that would bring such better coverage and performance.

Somewhat paradoxically, the same entities that can be expected to criticize too slow deployment of optical fiber and other advanced platforms also often argue against those investments, arguing that it is better to keep copper in place.

Telcos argue they need to--and just “want to”--replace high maintenance copper lines with lower-maintenance optical fiber connections (increasingly, they will argue that higher-cost fixed lines need to be replaced by lower-cost wireless access).

None of those are immaterial issues, as revenue fixed network providers can generate from those networks (whatever the access platform) are declining, as customer demand changes and as competitors on facilities-based alternative networks take half the available market share.

How Much Demand for Live TV Streaming?

source: GlobalWedIndex

Some 11 percent  of all streamers pay for live streaming television, a study by Cogent Reports has found. That might be viewed as a data point suggesting there is relatively little interest in live video streaming. That might not be the case.

Potential demand for live video streaming is getting to be a tale of multiple markets. There is the traditional TV content market, but there also is a faster-growing live video content “in the context of social media use” segment of the market. It is easier to measure “demand” in the former segment, than in the latter segment.

In the traditional video content business, there are further nuances. There arguably is less demand for live news programming; much more demand for live sports programming and high demand for live streaming of blockbuster events (sports and entertainment events).

But much of the growth in live streaming has to do with social media usage, not traditional linear TV viewing.

In 2017, most live streaming arguably is in the context of social media, not paid streaming video.

These days, live video streaming is more often something that happens in the context of a person using social media, not a paid video streaming service.

So one danger when conducting market research is self-fulfilling hypotheses. If an existing market is quite large and established, while another is quite small and new, any survey of buying behavior is going to show that there is relatively low buying of products in the small market. Conversely, studies of buying behavior will show high activity in big market  products.

Also, if most of the activity in a market is not consumed on a for-fee, subscription basis, any measurement of “for fee” subscriptions is going to miss the total amount of activity.

“With the exception of sports and news, our research shows that viewing live content is not in high demand as it is currently offered,” say researchers at Cogent Reports.

App Store Blocks Use of Templates

New rules for Apple’s App Store state that “apps created from a commercialized template or app generation service will be rejected.” That, some argue, is going to affect many small business apps that use lawful templates to create features from app assembly suites or app-creation tools.

Apple has the right to create its own rules. The point is simply that, increasingly, we see new examples of app, device or commerce providers acting as content gatekeepers. That is not a particular issue of somehow restricting “internet freedom,” but simply business decisions those firms are free to make.

Bits are not “treated equally,” anywhere in the internet supplier ecosystem. Almost nothing in the app, content, platform or device parts of the ecosystem actually treat bits or any other parts of their business practices and business models “equally.”

There are all sorts of reasons for that, including the drive to create distinctiveness and uniqueness, create new features and capabilities.

That is simply to point out that breathless warnings about the “end of the internet” because “all bits are not going to be treated equally” misses the point, badly. There are all sorts of practical ways content, apps and devices are not “treated equally.”

There are some elements of internet access policy that do make sense. Ensuring that consumers have access to all lawful apps is fundamental. But most claimed violations of network neutrality are misplaced. How Apple wants to run its app store is its own business.

Will Verizon Deploy its Deep Fiber Network Out of Region?

Sparring between various direct competitors in any business is unremarkable. Such marketing positions are perhaps even more nebulous than ever where it comes to 5G, as there are so many valid interpretations of what “5G” really means (practically and commercially).

It might also be helpful to remember that one fundamental principle, in such marketing wars, is that contestants emphasize as features what they can provide, while trying to downplay the features of what others can provide.

That should never come as a surprise. So too should we remember that what one person, firm or industry “cannot do” does not mean every person, firm or industry likewise “cannot do” something.

Still, there are some potential surprises about Verizon’s apparent decision to launch its 5G fixed wireless services outside its fixed network territory. The reason is that Verizon has talked about the advantages of its new deep fiber initiative as supporting multiple uses, and that logically would make most sense for in-region markets such as Boston, where the deep fiber network would support business customers, smaller business and small cell backhaul, but then also lay the foundation for consumer internet access.

The idea is that a single optical fiber trunking network will use separate wavelengths to support different use cases.

In the announced Sacramento fixed wireless market, it is not immediately clear that Verizon actually will deploy its deep fiber network.

It might make more sense to add incremental optical trunking on a more selective basis to support tower locations that have to be created or beefed up to support the fixed wireless initiative, as that might require less incremental optical trunking investment.

On the other hand, were Verizon to undertake a massive deep fiber network outside its fixed network footprint, that could lay the groundwork for an expanded assault on business markets out of region, using the mobile network assets.

In other words, if it invests in its own new optical fiber trunking network in Sacramento and other fixed wireless areas outside its core fixed network footprint, Verizon would have the ability to essentially become a full-fledged local access alternative for the first time, out of region.

It is not yet clear which of those deployment scenarios actually will happen. On the other hand, it is understandable that competitors might try to disparage the effort. Some other major competitors are not in position to do anything similar (either because capital is not available or there is no synergy with an existing fixed network).