5G is All About the Business Model

It is quite fair to note that the 5G business case is a work in progress. That is to say, nobody can be quite sure how well suppliers of 5G services will be able to generate significant incremental revenue, beyond “more bandwidth.”

It is true that end users consume more bandwidth every year, and every decade, and that supply (typical consumer network internet access speed) increases about 42 percent every year.

The question is whether internet service providers can monetize that usage, since capacity increases grow faster than incremental revenue. “New technologies mean declining prices, even as capacity grows,” notes Armand Musey, Summit Ridge Group founder.

In other words, if supplying 10 times more bandwidth means 10 times more capex, is there a business model, Musey asks. Beyond that, with use of new untethered and wireless access using unlicensed spectrum, especially indoors, is it at all clear that mobile operators are even the eventual suppliers of most of that bandwidth, asks consultant Bob Horton.

On the other hand, notes Zayo Technologies CTO Jack Waters, technology costs have dropped by orders of magnitude over past decades, so capex requirements per new unit of capacity are not linear.

Still, notes Kalpak Gude, Dynamic Spectrum Alliance president, who pays? In other words, what is the business model for any of the coming next generation networks? “Much of 5G sounds like internet of things, and IoT is mostly going to use fixed access,” Gude argues. “Where’s the value?”

source: Technology Futures

But 5G arguably is different in several ways. It will be the first mobile network generation where incremental revenue will come from non-human customers. And though some remain skeptical, 5G is viewed at AT&T as a replacement or substitute for the fixed network.

In fact, the 5G use case Randall Stephenson, AT&T CEO is “most excited about is the opportunity to have nearly, a nationwide broadband footprint and it could be a fixed line replacement.”

Of those attributes, it is the nationwide, gigabit everywhere angle that is most strategic. Up to this point, though mobile operators have had nationwide coverage, no provider of fixed network services has been able to reach more than a fraction of U.S. households and business locations.

For the first time, 5G means firms will have the ability to reach most customer locations with gigabit internet access speeds, on networks that will take only a few years to build, not decades. Also, regulatory barriers have prevented any fixed network firm from trying to reach nearly 100 percent coverage of consumer locations.

“The capacity is there, the performance is there, there's going to be full gigabit throughput,” Stephenson says.

As you would expect, given the lack of 5G handsets, fixed or nomadic applications and internet access are going to be the earliest-possible opportunities, as was the case for early 4G.

Verizon NG-PON2 Commercial Deployment

Verizon is making large-scale commercial deployments of its new NG-PON2 network in the first quarter of 2018.

“NG-PON2, allows us to converge our many service networks into a single unified intelligent network, and simplify our operating model by integrating the OLT and subscriber management system,” said Vincent O’Byrne, director of technology planning at Verizon.

NG-PON2 is not most notable for its use of multiple wavelengths per optical fiber or its use of tunable lasers in optical line terminals and optical network units, though those are novel, in comparison to older optical fiber access networks.

source: ISE

What makes NG-PON2 different is the ability to use a common cabling infrastructure to create services that are dedicated over discrete wavelengths. In other words, one physical network but multiple virtual networks.

That means a common cabling infrastructure can deliver enterprise, consumer, cell tower backhaul or smaller business services, even wholesale services without the need to overlay discrete optical cables for each type of network.

AT&T Sees Record Low Churn, With Bundles

AT&T now is seeing such low churn rates in its postpaid mobile business and especially with customers on bundles that the “customer life cycle” lengthens. Where accounts in the past might have remained in service for three years or so, AT&T now expects that account relationships could last  eight years, a level previously unheard of for consumer services (mobile, video, internet access). Churn at these levels is implying 100-month and more lives.

Basically, AT&T finds churn cut in half when customers bundle services including either their mobile phone service and gigabit internet access, and often both of those core products.

The company also believes it will see similar benefits for customers bundling video service with other products.

Half a decade ago, for example, mobile subscriber churn  was far higher than it is today. About 2010, monthly churn of two percent to three percent a month among some of the largest four U.S. mobile service providers was not unusual.

source: IP Carrier

source: IP Carrier

That has clear implications for the profitability of accounts, since the rule of thumb is that accounts with longer tenure are higher value, both because such accounts tend to spend more, and also because such accounts represent very low customer service costs.

Research done by Frederick Reichheld of Bain & Company (the inventor of the net promoter score) shows that increasing customer retention rates by five percent increases profits by 25 percent to 95 percent.

forentrepreneurs.com  

Gigabit Demand Now Drives Supply

Never underestimate the power of end user demand, order-of-magnitude price changes and better technology to spur changes in service provider behavior.

Not so long ago, knowledgeable executives in the cable TV and telecom industries doubted the level of consumer demand for gigabit internet access, especially when tariffs were in triple digits.

Randall Stephenson, AT&T Chairman and CEO, now says the company is “laser-focused in 2018 on building the world's premier gigabit network.”

Some might have doubted--given the capital investment--the ability to do so, as some now question the cost to build gigabit 5G networks.  

But the business context has changed. Cost curves for gigabit networks have bent lower. Retail tariffs for gigabit service have dropped by an order of magnitude. And even when most customers do not buy the headline gigabit services, they are upgrading to faster intermediate tiers of service in the hundreds of gigabits per second ranges.

Fiber to home costs, though declining a bit, are not the key change. What has changed is regulator acceptance of the idea that gigabit networks can be built in areas where there is demand, without requiring universal builds at that level.

Also, even when new competitors do not take more than five percent to 20 percent market share in entire markets, those new competitors recreate consumer expectations, driving end user demand for higher-speed services at new price points.

That “build in response to demand” pattern has been a fixture of U.S. telecommunications since the passage of the Telecommunications Act of 1996, allowing competitors for the first time to operate and build their own networks.

The ability to use other platforms--5G fixed wireless, mobile 5G; other forms of wireless or untethered access in combination with mobile access--also promises lower costs. Eventually, many believe, wireless and mobile networks will even rival fixed networks in terms of performance and retail price.  

On the other hand, it would be appropriate to note that the move to gigabit networks is only the foundation, not the goal. For AT&T, in its consumer fixed networks business, internet access by itself does not drive overwhelming amounts of revenue.

One takeaway from AT&T’s fourth quarter 2017 results is the importance of video entertainment, compared to internet access and voice as revenue drivers in the consumer segment of the fixed network business. Consider the wide gulf between U.S. video entertainment, internet access and other revenues: video drove 74 percent of fixed network consumer revenues.

Internet access represented just 15 percent of total, while the “other” category generated about 12 percent of total revenues.

source: AT&T

One way of describing those results is to note that internet access is a “dumb pipe” service. Both voice and video entertainment are “apps.” So AT&T, in its fourth quarter, generated 85 percent of its consumer fixed network revenues from “apps” and only 15 percent from dumb pipe internet access.

That, in turn, illustrates why AT&T will look to applications, services and maybe platforms as it grows its internet of things and 5G businesses. Ignoring profit margin for the moment, apps and services are where the money is.

In 4Q 2017, AT&T Earned 85% of Fixed Network Consumer Revenues from Apps, Not Access

One takeaway from AT&T’s fourth quarter 2017 results is the importance of video entertainment, compared to internet access and voice as revenue drivers in the consumer segment of the fixed network business. Consider the wide gulf between U.S. video entertainment, internet access and other revenues: video drove 74 percent of fixed network consumer revenues.

Internet access represented just 15 percent of total, while the “other” category generated about 12 percent of total revenues.

source: AT&T

One way of describing those results is to note that internet access is a “dumb pipe” service. Both voice and video entertainment are “apps.” So AT&T, in its fourth quarter, generated 85 percent of its consumer fixed network revenues from “apps” and only 15 percent from dumb pipe internet access.

That, in turn, illustrates why AT&T will look to applications, services and maybe platforms as it grows its internet of things and 5G businesses. Ignoring profit margin for the moment, apps and services are where the money is.

5G Telecom New Revenue Growth Shifts to Enterprise Sources

The telecom industry is moving to new business models that change revenue opportunities in both mobile and fixed realms. Among the biggest changes: mobile revenue growth is going to shift to enterprise, away from consumer; from people to sensors. And fixed network revenue growth likewise is shifting from retail to wholesale.

In the mobile segment, the advent of 5G networks actually represents a discontinuity. As mobile subscriptions sold to people saturate, growth is going to come from selling connections to sensors and internet of things devices, in part.

The bigger change is that mobile access providers will have to move up the stack into higher-margin services and apps that underpin the value of IoT.

The precursor is what is happening in media and communications, as more mobile and fixed operators discover that growth hinges on moving into the content portions of the internet ecosystem.

In the fixed network, more of the value is coming from backhaul for smaller cells, as well as services for IoT, inherently an enterprise opportunity, for the most part.

As mobile and untethered access becomes dominant, with new mixes of licensed and unlicensed spectrum, the business value of the fixed network also is changing, with unlicensed spectrum assuming a bigger part of the facilities mix.

There is a simple explanation for that forecast. Essentially, 5G cannibalizes 4G, as 4G cannibalized 3G and 3G cannibalized 2G, and 2G displaced 1G.

Revenue upside from new applications and use cases does occur, though. Apps and use cases based on internet access are displacing voice and messaging revenue, for example.

That will be true for 5G, as well. In principle, it is services and apps supporting internet of things (non-human users) that represents the incremental growth, as 5G for human users will mostly be simple displacement.

And most of those non-human use cases will involve enterprises building networks, and offering services, involving sensors and big data analytics to “do things in the real world” based on insights gleaned from patterns in all that big data.

source: Strategy Analytics

source: Strategy Analytics

App Providers Do Not Treat Their Own Bits "the Same" As All Others

One of the frustrations I have with discussions of network neutrality is the overly-broad application of the concept of “treating all bits alike” with the obvious reality that all bits are demonstrably not treated alike on today’s internet.

Ignore for the moment that governments often simply outlaw some apps and content. Forget “treating all bits alike,” some bits are simply blocked.

Even if one assumes network neutrality is about “treating all bits the same,” that does not happen. Most large app providers--and eventually virtually all--use content delivery networks to improve user experience, precisely by treating their own bits differently from others that do not use CDNs.

Google, Amazon, Microsoft, Facebook, and Netflix, for example, operate their own content delivery networks. Such private CDNs represent 61 percent  of all CDN traffic, rising to 68 percent by 2021.

By 2021, 71 percent of Internet traffic will be delivered from a content delivery network (CDN), up from 52 percent  today, Cisco predicts.

source: Cisco

In other words, the way consumers experience the internet already includes the clear recognition by app providers that delivery of bits benefits from not treating those bits in a “best effort” manner when flowing across wide area networks.

As one Cisco blogger notes, “the content is concentrated in the hands of a few companies, and the delivery of this content may bypass much of the Internet’s infrastructure if it is delivered from within a user’s metro area and traverses only a single service provider’s network, so it isn’t “Internet traffic” in any meaningful sense.”

That is the point: the internet is deemed too unreliable to provide consistent end user experience, so the major app providers simply build their own networks to bypass the internet. In principle, then, allowing consumers to have the equivalent of CDN features all the way to where they are is really what network neutrality is about.

In fact, most consumer apps--and all major apps--use CDNs to deliver their own bits faster, and in a more-predictable way. For business reasons, at least some app providers see business advantage to prohibiting access providers from using CDNs.

There’s more.

Though net neutrality includes several key elements--some of which, such as “no blocking or degradation of lawful apps”--are universally supported, a key “strong” net neutrality concept is that consumers cannot be allowed the use of CDN features through their local access networks (mobile or fixed).

There are other “extreme” understandings of net neutrality that go even further, limiting even the use of promotional or other sponsored forms of internet access that clearly benefit consumers, since those “no incremental cost” access programs eliminate the need for consumers to buy internet access to use apps.

Japanese mobile provider Line, for example, offers both free data (at low rates) as well as for-fee faster internet access, allowing its users to switch between modes as they choose. Some might call that sponsored access a violation of net neutrality.

Also, Line allows its users unlimited use of some apps, such as Line Messenger, Line Calls, and Line Video Chat without any data usage chargers. In favoring its own apps, Line most assuredly does not treat all bits and all apps the same.

Other mobile operators have different policies that operate in similar ways, exempting consumption of music or video from data plan charges, for example.

In principle, those policies are simply business practices, similar to free shipping, toll-free calling or any other promotional activity any business uses. Ironically, net neutrality supporters try to stretch the concept of “treat all bits the same” in ways that stifle the effort companies take to innovate and provide distinctive value--that often saves money--for their customers and users.

Some might say it is simply irrational for app providers that do not treat their own bits equally with other “internet” bits to deny that same practice--which does improve user experience--to other actors in the internet ecosystem.