5G Capex Might be Half that of 4G

It might be apparent to all--from regulators to providers to infrastructure and applications providers--that global telecom business models are under duress. That is to say, any honest analysis would conclude that the core business revenue model is under extreme pressure.

So we should not be surprised to find that the telecom supplier base also is under duress. One only has to note the evisceration of the North American core infrastructure industry (Nortel bankrupt, Lucent acquired by Alcatel, acquired in turn by Nokia; the emergence of Huawei as the leading global supplier; financial struggles at Ericsson and Nokia as examples.

At the same time, open source solutions, white box and alternative platforms are emerging, in part because service providers know they must dramatically retool their cost structures, from platform to operations, even as they seek new sources of revenue and roles in the ecosystem.

So 5G “will not be a capex windfall for the vendors,” says Caroline Gabriel, Rethink Technology Research research director. “Operators will prioritize coexistence with 4G and architecture to prolong the life of existing investments.

“There will be heavier reliance on outsourcing and on open platforms to reduce cost and transfer cost further than ever from capex to opex,” Gabriel argues.

In fact, Gabriel believes mobile operators will try to spend as little as half the capex on 5G roll-out that they did on 4G.

That is one answer to the question some raise: whether mobile operators can even afford to build 5G networks.

And many of the network enhancements--virtualized RAN and hyper-densification and massive MIMO antenna arrays--also will be applied to 4G, extending the useful life of advanced 4G.

That might be important in allowing 5G to focus on support for new categories of use cases, apps and revenue models.

Matters are largely the same in the fixed network realm. As a whole, U.S. fixed line service providers have had a tough time generating any net revenue growth since 2008, according to MoffettNathanson figures.

source: Moffett Nathanson

Much the same trend can be seen in Europe’s fixed network markets as well, as there has been zero to negative subscription growth since 1999. And the trend is happening even in the more-developed of South Asia countries, as fixed access declines (voice losses balanced by fixed internet access) and mobile grows.  

source: https://ars.els-cdn.com

That means, if anything, that cost pressures will be even heavier in the fixed network segment of the business, as any incremental capex or opex has to support an arguably-dwindling revenue potential.

U.S. Consumer Internet Access Improves at Moore's Law Rates

In any market, what really matters are the services that customers actually buy. That is as true for internet access as for automobiles. Some 60 percent or more of U.S. fixed internet access customers buy from cable companies. That matters.

In 2015, for example, the slowest peak connection speeds were in the 34 Mbps to 45 Mbps range; the fastest in the 65 Mbps to 86 Mbps range. That matters since, even where telco services were available, most people did not buy them. AT&T and Verizon did better than other telcos, though, holding their market share. The other telcos mostly are losing share to cable competitors.

Source: NCTA

Also, most of the customers live in areas where speeds are fastest (west coast and Northeast and Mid-Atlantic regions).

By 2016, cable operators were offering speeds in excess of 100 Mbps, while Verizon was offering 88 Mbps speeds.

The key point is that the high end of internet access speeds sold to U.S. consumers has doubled about every year, increasing by an order of magnitude about every five years.

At least for U.S. cable companies, Moore's Law applies to internet access speeds: speeds double about every 18 months.

The point is that, despite nearly-constant criticism, U.S. internet access speeds have improved at Moore’s Law speeds, and U.S. policy on internet access mostly has provided incentives for internet service providers to invest in such growth.

source: Ookla

Industry Strategy Now All about Transitions

Former Cisco CEO John Chambers has had a well-known theory about transitions: essentially, managing transitions underpins the business. “What Cisco has always done...is I focused on market transitions,” Chambers has said. “We moved from routing to switching...from switching to voice.”

We did the same thing with video, then we did the same thing in the data center,” he adds.

One might argue that firms such as AT&T are involved in precisely the same sort of management and strategic shift.

In developed markets, the key issue is what actors can do in the face of declining demand and revenue from all legacy services. Beyond efficiencies and acquisitions that increase scale, what fundamental strategy makes most sense.

And that is where opinions diverge. Analysts with a proper “near term” financial focus often urge firms such as AT&T to invest more in internet access capabilities, not content assets, the logic rationally being that if the foundation service of the future is internet access, a leading telco cannot afford to lost the market share battle to competitors.

Others might argue that the business itself is changing, that the key competitors really are app providers, not other access providers, and that the best transition model already has been pioneered by Comcast and firms such as Cisco.

In that scenario, the telecom industry is in a big transition from “access” revenues to “app” revenues (essentially a return to past practice, when nearly 100 percent of revenue was earned from apps such as voice).

So access providers have to diversify their revenue streams from “mostly access” to “access and apps and content.” And that change in industry dynamics is driven from outside, by the likes of Google and Facebook, not necessarily actions taken by access competitors, though that also is happening.

So it is that AT&T executives face questions about the wisdom of that firm’s content strategy. To be sure, AT&T also says it is moving fast towards gigabit network capability, so it is not neglecting investments in the access networks.

On the other hand, AT&T has taken criticism first for its DirecTV acquisition (on fears the linear business was shrinking) and now the Time Warner acquisition (more a move into content assets).

Proponents of the view that tier-one access providers must move up the stack and diversify their core revenues will simply note that revenue growth for most developed market tier-one service providers in recent years has come from video revenues.

“Since the day we bought DIRECTV, we assume that traditional linear video would be in a declining mode since kind of the nature of it, OTT and the ability to consume video on mobile devices, we believe would be the trend and the way where things went, we wanted to be in the leadership position,” said Randall Stephenson, AT&T CEO.

“We run these transitions all the time, right?” said Stephenson. “When you have technology transitions or business model transitions whether it's fixed phone service to mobile, whether it's a private line kind of service for business to VPN, whether it's -- you can kind of go down the list of whether it's feature phones to smartphones, we run these transitions and we think we're pretty good at it.”

Yes, there is a secular change from linear to on-demand consumption modes. But assets in linear are the building blocks for the move into on-demand subscription modes. Yes, there are gross revenue implications. But video entertainment represents the bulk of “new” consumer segment revenue sources larger developed market telcos have uncovered in recent years.

That can be seen in AT&T’s revenue contributors. Between 2013 and 2017, though business solutions and international revenues have grown fractionally, while consumer mobility declined, it was video (entertainment group) that showed clear growth of 134 percent.

source: Statista

That same sort of change will have to happen in the business revenues segment as well, in some ways related to internet of things. It is now all about handling the transitions, as Chambers always said.

FCC Says Common Carrier Regulation Depressed Investment

From 2012 to 2014, the two years preceding the Title II Order, fixed terrestrial broadband Internet access was deployed to 29.9 million people who never had it before, including one million people on tribal lands, the Federal Communications Commission says.

In the following two years, new deployments dropped 55 percent, reaching only 13.5 million people, including only 330,000 people on tribal lands.

source: FCC

My own analysis suggests there was a sharp drop off in 2015, with growth in 2016, but clearly at lower levels than had been seen in 2012 to 2014 periods.

New Fixed Network Connections Added 2012 to 2016
growthrate		1.20%	1.22%	1.81%	2.11%
up to 10 mbps	2012	2013	2014	2015	2016
passings	290.7	294.2	297.8	303.2	309.6
net adds		3.5	3.6	5.4	6.4
25 Mbps		2013	2014	2015	2016
passings	254.4	263.9	284.3	286.9	297.8
growthrate		3.73%	7.73%	0.91%	3.80%
net adds		9.5	20.4	2.6	10.9
50mbps
passings	155.7	187.4	270.8	282.4	292.8
growthrate		20.36%	44.50%	4.28%	3.68%
net adds		31.7	83.4	11.6	10.4
total net adds		44.7	107.4	19.6	27.7
source: analysis of FCC data

From 2012 to 2014, mobile LTE broadband was newly deployed to 34.2 million people, including 21.5 million rural Americans. In the following two years, new mobile deployments dropped 83 percent, reaching only 5.8 million more Americans, including only 2.3 million more rural Americans.

And from 2012 to 2014, the number of Americans without access to both fixed terrestrial broadband and mobile broadband fell by more than half—from 72.1 million to 34.5 million.

source: FCC

Sometimes Uber is Cheaper than Owning a Car for Getting to Work

If you have to pay for parking, Uber can be almost as affordable as driving your own car, analysis suggests. Generally speaking, Uber is not a substitute in many western and less-dense areas, but cheaper than driving and parking in many metro areas.

source: NerdWallet

Back to the Future for Networking

It now is rational to argue that the cost of supplying bandwidth, the amounts of bandwidth offered and the cost of building access networks of very-high bandwidth (gigabits per second, with a business model that works) are improving fast enough that orders of magnitude of new demand can be met with orders of magnitude of new supply, at costs far lower than possible in the past.

It also is rational to argue that roles within the access ecosystem are about to become more  heterogeneous, allowing new actors to supply bandwidth, with new business models.

In large part, past is prologue. Recall that the historic division in networking has been at the demarcation point between the wide area “public network” (telcos, cable, satellite, fixed wireless) and the “inside the building” network (local area networks).

To wit, the WAN has been the place where most customers buy service. The LAN has been the realm of private networks owned by the enterprise, the tenants of a building or owners of a business.

In the coming era of heterogeneous networks, that fundamental distinction will remain. The logical preserve of WAN networks (mobile, fixed, satellite, fixed wireless), while the “indoor” space will largely remain the preserve of end users--consumer and business--who “own” their local networks.

That historic distinction has been harder to envision in the era of mobile communications, as “inside the building” use of mobiles has been a contested space. People expect mobile networks to reach inside buildings, but most people and organizations also realize that is an issues, and have learned to lean on their own networks (Wi-Fi, mostly) to improve data connectivity.

Voice connectivity has been a bit more challenging, but IP voice eventually will fix that problem as well.

New protocols will help, allowing entities to build their own 4G or 5G indoor networks  for boosting mobile performance. Other developments, including shared spectrum, will allow privately-owned inside-the-building networks to support 4G and 5G mobile connectivity.

That will allow new thinking about how internet access and mobility services are supporting inside buildings. But that is simply a return to historic practice, where WAN service providers added greatest value outside the building, while owners and tenants essentially built and operated their own internal networks.

Back to the future, in other words.

Google et al Really are the Competition for Major Telcos, Not Other Telcos

For some time now, telecom executives have mentioned in surveys that their main competition  is not other service providers, but over the top app firms such as Google, which now lead markets for content, apps and platforms, and are emerging in devices and infrastructure.

Yet other surveys have executives citing device or other platform suppliers as the top threats, not other service providers.

And yet the typical executive or department head, on a day-to-day basis, likely continues to benchmark performance by other service providers. So mobile operators are obsessive about their market share, compared to other mobile operators. Cable operators tend to benchmark against telcos, fixed network telcos against cable.

Rival satellite providers consider other satellite providers to be the key share benchmarks.

All of that makes sense, yet obscures the primary challenge (some would say the existential threat) to the “telecom” industry, namely the shift of value away from access to applications, and the ability of app platforms and providers to subsume access functions and vertically integrate.

It would be correct to say that app provider strategy includes vertical integration, allowing the firms to better control both their supply chains as well as reducing cost.

For example, 60 percent of trans-Atlantic traffic now runs over privately-owned and operated undersea networks, not over public telecom networks. One way of describing this is to say that 60 percent of international traffic on those routes has been removed from the telco addressable market.

Google and Facebook already have moved into public Wi-Fi, fixed network access, mobile services, satellite services, access equipment standards and ways to subsidize internet access.

But that is only part of the story. The leading app and platform providers have emerged as the leading forces in cloud computing as well, with a growing role in devices.

Devices, in fact,  are among the building blocks of Google’s growth strategy, to be built on Google, cloud, hardware and YouTube, Google says.

Hardware revenue, though still included in the “other” revenue category, grew 38 percent in 2016 and seem to have doubled in 2017.

The commercial reason behind Google’s emerging business model appears to be the value that a single company can create if it combines content services with network hardware, many would argue.

One way to create this value is by aligning networks with content.

And that is the reason why Comcast’s acquisition of NBCUniversal was so instructive, and why AT&T wants to buy Time Warner. If your primary competition is app firms with network assets, then telcos likewise need to become app providers with access network assets.

That is seen first in entertainment video, but will deepen in other areas, such as internet of things. In that sense, the U.S. Department of Justice effort to block the AT&T acquisition of Time Warner is misguided. That would block a necessary step AT&T must take to survive the competition with the leading app providers.

In other words, the “relevant market” is no longer “telecom services.” The walls between content, media, access and communications are evaporating. Firms such as AT&T must vertically integrate, as their most-important competitors are doing.