What Will 5G Cost?

Will 5G cost so much more than 4G that the business model breaks? If orders of magnitude more bandwidth have to be delivered, and if propensity to pay does not change but incrementally, what happens to capex cost?

What happens if the number of cell sites grows two orders of magnitude?

The number of U.S. cell sites, for example, could balloon from perhaps 80,000 to as many as a million, estimates Jack Waters, Zayo Technologies CTO.

What happens to backhaul costs? Will advanced radio arrays cost less, more or the same as today's radios?

Some fear capital investment could be double to triple the levels of 4G. By other estimates, 5G will require just four percent higher capital investment than did 4G.

Those are huge uncertainties.

But cost parameters are changing so much that some expect 5G capital investment might actually be less than 4G, even if the historic trend is that each next generation mobile platform requires incrementally more investment.

Over the last several decades, infrastructure costs (transport and access) have dropped by orders of magnitude, says Waters, referring to the cost-per-bit parameters.

source: European Commission

One reason is infrastructure cost improvements, including open source platforms that inherently cost less than proprietary solutions.

Nokia and Facebook, for example, are working on 60-GHz fixed wireless platforms for urban or suburban areas. Nokia expects to develop Facebook’s Terragraph network and will conduct trials of the technology this year.

Combining Nokia’s wireless passive optical network protocols with Terragraph's mesh-routing and multi-hop capabilities allows broadband providers to wirelessly deliver gigabit services over wider areas with high reliability and meet growing demands for ultra-broadband access, Nokia says.

Nokia and Facebook will also work together to accelerate IEEE's 802.11ay industry standard, leveraging Nokia's Wireless PON and Terragraph's TDMA scheduling capabilities, Nokia says.

Wireless PON is based on 802.11ad WiGig technology and provides a wireless drop for fiber-to-the-home networks.

Access points can be easily mounted on utility poles, street lights or a building facade, and deliver gigabit-per-second speeds to a self-installable WPON Home unit.

The point is that 5G capex requirements might not scale linearly as have prior network generations, despite the heavy reliance on small cells and need for dense optical backhaul.

In fact, unit costs for mobile data have been falling for some time.   

source: Analysys Mason

90% of Internet Users Now Use Cloud-Based Apps

Perhaps 3.6 billion global consumers now use cloud computing, in the form of the apps and sites they use regularly. If there are a total four billion internet users globally, that suggests 90 percent of world internet users use cloud-based  applications and services.

That has obvious implications for the computing industry.

source: wearesocial

In 2017, Amazon Web Services generated about $18 billion of revenue for Amazon. Microsoft, which includes its cloud apps in its cloud revenue segment, booked perhaps $27.4 billion in cloud revenue.

From 2016 to 2017, AWS revenues grew 42 percent from $12 billion to $17 billion, while Microsoft's cloud revenue contributions grew about nine percent.

Looking just at customers of cloud computing services (and not including applications), AWS has perhaps 34 percent installed base; Google 20 percent; IBM 15 percent; Microsoft about 15 percent.

source:Credit Suisse

In 2017, enterprises spent about as much on cloud infrastructure services as they did buying servers to support their internal computing operations. But a majority of computing workload probably now happen on cloud facilities.  

source: ITCandor

More significantly, cloud spending is going to displace a greater percentage of enterprise computing spending in coming years.

source: IT Candor

source: Gartner

"Winning" is Not What It Used to Be

What does “winning” look like for telco internet access? In the monopoly era, this was no question at all. In the competitive era, maximum feasible market share is something else, entirely.

And that underpins nearly all business models. In the monopoly era, a network could be built on the safe assumption that upwards of 95 percent of locations passed would generate revenue.

In the competitive era, it is doubtful whether maximum possible success ever leads to market share more than 45 percent. In other words, no matter how good a service provider is, or how powerful its value proposition, more than half of all locations will not generate any revenue.

Rough implication: the cost of building a network, “per customer,” doubles.

source: Speeda

In Singapore, SingTel, the leader, had 44 percent market share in 2014.

source: Alpha Economics

In Nigeria, MTN, the market share leader in 2017, had 39 percent share.

source: Pulse

The clear implication is that no service provider, anymore, can build a network and assume it will get much more than about 40 percent to 45 percent market share, at best. In other words, more than half of capital investment in the access network will routinely be stranded.

Operating costs “per customer account” might be as much as double what they might have been if market share were closer to 95 percent.

All that constrains our notions of what “success” looks like. For no matter how much a contestant invests, it cannot reasonably expect to achieve much better than 40 percent to 45 percent market share.

That necessarily raises the danger of “over-investment” in facilities and features that will not provide an adequate financial return.

Consider a U.S. telco modeling a gigabit internet access rollout. Assume that telco has present market share of 35 percent to 40 percent. How much better can it do, if it upgrades to gigabit access?

In all too many cases, the answer is “a few points of market share.”

Consider Cincinnati Bell, which is in the process of upgrading to fiber-to-home across its service territory. “Our results demonstrate that we continue to compete and win against cable with fiber,” said Leigh Fox, Cincinnati Bell CEO.

“Competing” in this case means having 40 percent market share, and gaining about three share points in the year.

Since its main competitor Charter Communications, is in the midst of its own upgrade to gigabit speeds, the issue is how much more share Cincinnati Bell actually can take. The worst case answer might be “not much more.”

The best case answer might be 10 share points, to reach something like a 50-50 split of the market, until and unless other competitors enter the market. In that case, Charter and Cincinnati Bell might see something like a 40-40-20 or 45-45-10 share pattern, as a reasonable expectation of “winning.”

Winning is not what it used to be.

What Does "Winning" Look Like for Telco Fixed Internet Access?

What does “winning” look like for telco internet access? Many tier-one U.S. telcos, for example, have about 40 percent market share. Is that winning? It depends on one’s perspective.

Share of 40 percent means one thing if share previously was 35 percent. It means something else if share formerly was 50 percent.

Many independent telcos other than AT&T and Verizon have been losing market share to cable operators for some years, and might well have less than 40 percent share. Cincinnati Bell seems to have been in that category, and seems to find that its fiber to premises program is allowing it to regain market share.

“Our results demonstrate that we continue to compete and win against cable with fiber,” said Leigh Fox, Cincinnati Bell CEO. The caveat is that Charter Communications has not yet launched its DOCSIS 3.1 gigabit service in Cincinnati. That will be the test of whether Cincinnati Bell can continue taking share from Charter.

“Competing” in this case means having 40 percent market share, and gaining about three share points in the year.

“During 2017, we added both video and Internet subscribers despite continued intense marketing and advertising efforts from our primary competitor,” said Fox. “In the fourth quarter, we added 5,400 Fioptics Internet subscribers and ended the year with approximately 227,000 total subscribers with penetration rates reaching 40 percent and ARPU increasing three percent year-over-year.

Will Mobile Users Still Rely on Wi-Fi in the Future?

You might not be surprised to learn that U.S. Android users consume most of their mobile data using Wi-Fi. But you might be surprised that customers on unlimited usage plans also rely mostly on Wi-Fi for data access. But that is what happened in January 2018, according to Strategy Analytics.

Android customers buying unlimited usage plans consumed only about 28 percent of total mobile device data using the mobile network, 72 percent on Wi-Fi.

That seems counterintuitive, if most users also are on 4G networks offering performance often better than Wi-Fi  (especially on public hotspots). In fact, behavior should already be changing.

“Customers are rational,” says Craig Moffett, MoffettNathanson analyst. “When pricing incentives favor Wi-Fi, customers use more Wi-Fi. When pricing incentives shift, so does behavior.”

In fact, some studies suggest that nearly 40 percent of U.S. “at home” access uses the mobile internet, not a fixed connection. In part, that might be because most internet sessions now happen on mobile devices. In part, that might be because many users do not buy fixed internet access, or do not pay for it.

source: Reportlinker

Many of those users say they are on unlimited usage plans and therefore do not need to offload to Wi-Fi to save money.

Of course, it also is possible that self-reported usage actually does not reflect actual usage. Respondents might have been connected to a Wi-Fi connection at home, and not known it. The sample might be include an unrepresentative universe of respondents who do not buy, or have access to, fixed internet access, and must rely on mobile network access.

source: Reportlinker

source: Strategy Analytics

source: Strategy Analytics

Still, Wi-Fi usage could fall in the future, as more users opt for unlimited plans, as 5G networks start to offer speeds equivalent or faster than fixed connections and as the cost of mobile access starts to near parity with fixed network prices.

Look to Google, Apple for Emergency Location Innovation

Here are two examples of innovation in the telecom industry that come from “outside” the industry. First, Amazon’s Alexa and the line of Amazon voice appliances has created a new platform for consumer voice. Basically, Alexa is becoming a voice-activated “home phone.”

The other example is emergency calling, where it is Google that is innovating in location services. In recent tests, Google tested emergency call location at 911 call centers with West Corp. and RapidSOS.

RapidSOS said its portion of the trial involved about 50 911 centers covering some 2.4 million people in Texas, Tennessee and Florida.

Location data in more than 80 percent of the 911 calls using Google’s technology were more accurate than the carrier data in the first 30 seconds of a call, according to RapidSOS.

Google’s data provided an average location estimate radius of 121 feet, RapidSOS said, while carrier data averaged 522 feet. Carrier data also took longer to reach 911 centers, RapidSOS said.

Google has said it hopes to deploy the technology broadly across the U.S. some time this year. Apple also is said to be developing such location technology.

There are lots of reasons why innovation, research and development have largely moved outside service provider purview. Profits to support such research no longer exist, for starters. Telco research also was outsourced to industry suppliers and in some cases to third party research outfits.

In that absence, and because of profound changes in ownership of key data stores, key device and app suppliers appear to be moving into the breach.

Is Telecom Like Airlines, or Autos?

Analogies sometimes are helpful when trying to understand the underlying dynamics of the “telecom” industry. In past centuries, telecom might reasonably have been likened to roads, pipelines, electrical or water utilities. They were considered “natural monopolies” not amenable to competition, with state ownership quite common.

In the competitive era, beginning nascently about 1985, new analogies were more apt. Some have likened competitive telecom to the airline industry . Both were highly regulated in the past, were then deregulated, are capital intensive, subject to scale economics, with global and local business models.

Both industries now rely on multiple revenue streams, where in the past revenue was generated only from customers buying tickets or making phone calls. Airlines now generate revenue by selling miles to affinity and reward program providers, while telcos are moving into advertising-- where business partners, not subscribers--are the revenue model.

Consultant Martin Geddes says both industries actually deal in abstractions, or should.  The “value” is destination arrival or application performance--an outcome--rather than the underlying resource (capacity, seats).

In other words, the performance (specificity of arrival time) is the outcome and value. High-value, time-constrained arrival is one class of service, while best-effort arrival is another class of service. It might cost one amount to be guaranteed arrival on a specific day, at a specific time; it might cost quite a lot less to “get there” with some possible delay (the next day, eight hours later, and so forth).

There are some barriers to full competition, including ownership of local access facilities in one case and landing slots in the other. Both industries have been reshaped by low-cost competition. But the nature of the competition has changed. Back around the turn of the century we might have thought the competition would come from new service providers.

As it turns out, the new competition comes from “over the top” app providers. To be sure, facilities-based competitors do exist, mostly in the mobile segment of the business. But the primary assault as been by application providers whose products simply offer product substitutes that work on any internet-connected device.

Think of the analogy to business partner (advertising) revenue: app providers often make their money from advertising, not subscriptions and direct payments by users (customers).

But the next set of analogies might be to privately-owned autos. Fleets of self-driving vehicles might eventually obviate the need for private ownership of automobiles. Transportation still is provided (by fleets of self-driving vehicles available on demand), but not by one means (car ownership).

Some people might object: “there still will remain a need for access.” That is correct. Networks still will be needed. What is not clear is that “ownership of my own network” is required. Netflix is a major, tier-one provider of subscription TV. But it owns not retail access networks. Neither does Skype, Google, Facebook or Amazon or Alibaba.

In that new analogy, access networks are like fleets of self-driving cars. They are available to provide transportation as needed (over the top apps).  But the present “owned automobile industry” (telcos and other service providers) will suffer, as people will buy far fewer automobiles.

That is the inevitable consequence of adopting the internet and IP networks are the next generation network. Use of apps is decoupled from ownership of networks. So long as any user has internet access, internet apps work.

To use the auto analogy: people (app providers) will not have to “own” cars to satisfy many  transportation needs. Vehicles (network access) still will be necessary. “Owning” the networks (access facilities) will not be required.

As it turns out, the airline analogy was the least of the telecom industry’s problems. The self-driving auto--and its ability to support fleets of on-demand accessed transportation--is the real problem.