Historic Change in Telco Business Thinking

It is not hard to understand that telecom’s historical geographic legacy--specified areas of operation--has implications for operator efforts to grow application businesses at scale. In other words, service providers of all types are accustomed to creating services and apps that run on their own networks, in their licensed territories.

In a new ecosystem where applications run “over the top,” without regard to geography, and where revenue models often require scale, that older mentality often is unhelpful.

One salient and helpful development, in that regard, are the new OTT video streaming apps designed expressly to run on any network, at scale. We sometimes miss the importance.

Where in the past apps were designed to run on “my network,” now apps are being created to run on “anybody’s network.” In other words, the new apps are borderless (to the extent allowed by copyright rules).

That is a fundamental prerequisite for apps in the internet era, especially those with scale requirements.

source: S. Saravanan

This is something quite new. In the past, “geography” has been a key mental, legal and operating foundation guiding strategy, as has the notion that apps “run on our network.” In the next evolution of the industry, network footprint will be part of the business, but not its future.

As operators are shifting from “video that runs on our network and is sold to our customers” to “video that any consumer can buy from us.”

source: S. Saravanan

In other words, the future of apps and revenue are separated from the network, perhaps less so for mobile than fixed networks, but separated nevertheless.

So strategy will change in fundamental ways. For the first time, at scale, at least some service providers will try to create business models based on apps that run at scale on anybody’s network, the same strategy as used by Google, Facebook and other app providers.

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.