U.S. Fixed Network Internet Access Market Reaching Saturation?

Is the U.S. consumer fixed internet access market near saturation? It is quite possible.

By at least one estimate, there are 95 million U.S. buyers of fixed network internet access.

In the fourth quarter of 2017 there were an estimated 136.9 million U.S. housing units. Vacancy rates are an issue, though. Some 16.7 million of those units were vacant.

In the fourth quarter of 2017, some seven percent of rental units were unoccupied, as were some 1.6 percent of owned residences. So assume the number of residences where fixed network consumer telecom services could be sold is about 120.2 million.

So that implies 79 percent of all U.S. households buy a fixed network internet access subscription. Assume another 1.6 million buy a satellite internet access service (about one percent of occupied U.S. residences. That implies 80 percent of occupied homes buy internet access.

But we also must add another six million subscribers served by all the smaller telcos, cable TV companies and independent internet service providers (assuming those smaller fixed network suppliers supply five percent of homes). That adds another five percent, bringing consumer household buying of internet access up to about 85 percent.

Also, some 10 percent of homes use mobile internet access exclusively, according to the Pew Research Center. So add another 12 million occupied U.S. homes to the total of buyers of internet access.

That brings buyers of internet access up to about 95 percent of U.S. occupied homes. The point is that we fast are approaching the point where at-home internet access is saturated. There simply are not that many more U.S. homes to convert, possibly six million or so (unless the percentage of occupied homes grows and millions of new households are formed, driving demand for new housing stock).

In fact, some might argue that as we move into the 5G era, there will be even more mobile substitution. That means it is possible we are very near to the peak of fixed network residential internet access penetration. With the exception of older demographics, home internet access adoption home internet access adoptionhas been flat since about 2010.

Leichtman Research Group reports the 14 largest U.S. cable and telephone providers of internet access  in the United States, representing about 95 percent of the customers--acquired about 2.1 million net additional high-speed Internet subscribers in 2017 (that figure also includes business users).

Broadband Providers	Subscribers at End of 4Q 2017	Net Adds in 2017
Cable Companies
Comcast	25,869,000	1,168,000
Charter	23,903,000	1,310,000
Altice	4,046,200	83,700
Mediacom	1,209,000	47,000
WOW (WideOpenWest)*	730,000	11,100
Cable ONE**	524,935	11,027
Other Major Private Company^	4,880,000	90,000
Total Top Cable	61,162,135	2,720,827
Phone Companies
AT&T	15,719,000	114,000
Verizon	6,959,000	(79,000)
CenturyLink	5,662,000	(283,000)
Frontier	3,938,000	(333,000)
Windstream	1,006,600	(44,500)
Cincinnati Bell	308,700	5,500
FairPoint^^	301,000	(5,624)
Total Top Telco	33,894,300	(625,624)
Total Top Broadband	95,056,435	2,095,203

The point is that market share shifts are likely to be the key battleground in the consumer fixed network access market, as it appears we are very near saturation, where nearly every customer that wants to buy the product already is a buyer.

AT&T Time Warner Acquisition Could Trigger Merger Wave, or Quash It

Consolidation tends to come in waves, as big deals by a major competitor trigger competitive responses by other contestants. So approval--or rejection--of the AT&T acquisition of Time Warner will matter.

Core Network Virtualization and the "Dumb Pipe" Reality

Virtualization and “dumb pipe” are related concepts and practices in core networks, just as applications and services now are logically separated from the transport and access networks. And both those trends illustrate where value is being created within the internet  ecosystem.

Today, owners of networks are virtualizing. Eventually, it is likely to be possible to federate across networks, for that very reason. So essentially, the commoditizing of physical infrastructure will increase.

“Virtualization implies that the control of services and networks can be accomplished outside the physical networks,” and separately from the bit transport layer, argues  Rick Talbot, Current Analysis principal analyst.

That applies initially to any single network, but eventually is likely to extend across multiple federated networks as well, where control lies outside any single transport network.

Network functions virtualization, for example, replaces embedded software in physical network elements across a range of appliances (firewall, packet core, broadband network gateways, customer premises equipment, network address translation, session border controller, provider edge routers), for example.  

“It is only a matter of time before most, if not all, of the specialized network elements and appliances are replaced with--or supplemented by--virtualized instances of themselves,” says Talbot.

There are analogies to this process of core network virtualization. Consider the generation of economic value within the internet ecosystem.

source: AT Kearney

At the moment, perhaps 15 percent of value (measured as firm revenue) is claimed by internet access providers. In the future, that is likely to fall, if mostly because the rest of the ecosystem will have far-higher rates of growth.

To be sure, service providers want and need networks that are more flexible, cost less and also are more capable. Virtualization is one way to achieve those goals. But virtualization also tends to lay bare the growing “dumb pipe” role of networks. Even when networks are “smart,” that smartness is abstracted from the physical network.

At the same time, the separation of logical and physical functions of networks is happening both within the core transport network, within data centers, in access networks and consumer devices.

The obvious analogy is the separation of application supply and network access that is fundamental to all internet protocol networks: any lawful application can be reached and used by end users over an IP network so long as they have authorization to use the apps, irrespective of the IP network used for access.

Where access to communication services once was highly vertically integrated, it now is highly disaggregated. Today, most services and applications used by most consumers are owned by third parties, not the access service providers.

To be sure, access providers (cable, telco, satellite, fixed wireless) have revenue models based on a mix of owned applications (voice, messaging, video entertainment) and “dumb pipe” (internet access, both fixed and mobile) services.

But it is hard to avoid the notion that, over time, value is shifting away from the supply of physical connections to networks (access) and towards “over the top” applications and devices. That does not preclude access providers creating or owning OTT applications themselves.

That, in fact, is what Sling and DirecTV Now are all about; or why Verizon owns automobile application assets.

In a study by AT Kearney of the U.K. internet ecosystem, analysts estimated that internet access accounts for 35 percent of the U.K. Internet value chain revenues (16 percent of the total Internet ecosystem). Excluding the value of e-commerce, the internet ecosystem in 2010 already had apps and services claiming 65 percent of value.

source: AT Kearney

The point is that virtualization is another example of the way networks are changing: as services and features have been abstracted from the network, now even the control and management of networks is being abstracted from the physical facilities.

Data Centers Drive 100G in 2017

Data center adoption of 100 Gbps platforms is driving global Ethernet switch sales, says IHS Markit

Worldwide Ethernet switch revenue grew twopercent sequentially in the fourth quarter of 2017 to $6.7 billion.

For the full-year 2017, revenue rose 8 percent, reaching nearly $25 billion—the strongest growth in seven years, says Matthias Machowinski, IHS Markit senior research director.

“The transition to 25/100GE architectures in the data center is in full swing, driving strong gains in 25GE and 100GE, while in turn bringing down the 40GE segment, which had its first annual decline,” Machowinski said.

100GE Port shipments of 100GigE grew 400 percent year-over-year, and reaching over four million ports in 2017, he said.

Growth in the North American Ethernet switch market was above five percent. Asia Pacific remains the top growth region, primarily due to China.

Cisco’s revenue declined two percent year-over-year, while Huawei grew its revenue 24 percent HPE (Aruba) grew 13 percent.

IHS Markit

OTT Versus Linear Video is Becoming a Global Battlefield

By now, nobody is surprised to hear that linear video subscriptions continue to drop or that over the top subscriptions are growing. Perhaps the bigger story is the globalization of the business. Netflix now is a global content supplier, while most other providers operate mostly in a single country, or a small number of countries.

So while it still makes sense to track how U.S. service providers are doing, compared to U.S. competitors, the battle has become global, and Netflix arguably is the leader, in that regard.

source: Statista

In aggregate, there are more U.S. paid streaming accounts than linear accounts in service.

Netflix has some 55 million U.S. accounts, while Amazon Prime has some 90 million subscribers. All the largest linear video providers together have about 92.2 million accounts.

Total revenue is another story, as monthly subscription revenue earned by a linear account can be an order of magnitude greater than the revenue from any single OTT streaming account.

source: Ovum (Informa)

In 2017, for example, the major U.S. providers lost about 1.5 million accounts, up from some 760,000 in 2016, according to Leichtman Research Group.

The big swing was that streaming services owned by the linear providers gained 1.5 million accounts, nearly the amount lost by the two satellite services.

The biggest six cable companies now have about 48.1 million video accounts. Satellite TV services claim 31.5 million subscribers (including DirecTV, owned by AT&T).

The largest three fixed network telephone providers have 9.2 million subscribers (nearly all provided by AT&T and Verizon).

The top OTT services have about 3.4 million subscribers.

Pay-TV Providers	Subscribers at End of 4Q 2017	Net Adds in 2017
Cable Companies
Comcast	22,357,000	(151,000)
Charter	16,997,000	(239,000)
Altice	3,405,500	(129,000)
Mediacom	821,000	(14,000)
Cable ONE*	283,001	(37,245)
Other major private companies**	4,200,000	(90,000)
Total Top Cable	48,063,501	(660,245)
Satellite Services (DBS)
DIRECTV	20,458,000	(554,000)
DISH TV^	11,030,000	(995,000)
Total DBS	31,488,000	(1,549,000)
Phone Companies
Verizon FiOS	4,619,000	(75,000)
AT&T U-verse	3,657,000	(624,000)
Frontier	961,000	(184,000)
Total Top Phone	9,237,000	(883,000)
Internet-Delivered
Sling TV^^	2,212,000	711,000
DIRECTV NOW	1,155,000	888,000
Total Top Internet-Delivered	3,367,000	1,599,000
Total Top Providers	92,155,501	(1,493,245)

Netflix Wants Massive Disruption of Every Internet Access Market in the World

The thing about value chains is that, lower in the stack or earlier in the chain, each participant’s revenue is a “cost” to other participants. That explains, as much as anything, industry segment views on network neutrality, inter-segment competition, regulation and antitrust action, irrespective of the public policy goals any particular policy represents.

Be clear, that does not mean there are only naked commercial interests involved. There are legitimate issues of public policy. But for every element of public policy, there are corresponding financial interests.

Example: Netflix views on disruption of access markets. Universal internet access availability and massive internet access cost declines are preconditions for Netflix and its business model.

“Reliance Jio has been a transformational network in India and has brought down data cost massively,” says Netflix CEO Reed Hastings. “There are other people around the world having that kind of impact and can get people to use internet more.”

“We hope someone would do a Reliance Jio in every other country,” says Hastings.

It would be exceptionally hard to find any reasonable objection to the policy notion that every citizen and consumer should have access to the internet, at prices they can afford.

At the same time, it is incontestable that the widespread availability of cheap internet access is a precondition for the business models of every application provider and device manufacturer, while high-quality (fast, reliable, low latency) is a precondition for some business models.

Since application providers sit “at the top of the stack,” every other segment’s revenue streams are “costs” for the application layer providers.

That is true even when the app provider has vertically integrated all or most of the value chain (silicon, processors, optical fiber, communication networks and elements, network management and operating system software, data centers, end user devices, personnel, marketing platforms and fulfillment mechanisms.

That explains why retail telecom service providers care about the cost of servers, switches, construction, optical cable, management and billing software, end user devices and software used to create and deliver the actual end user applications, union contracts and so forth.

All those are cost inputs to the retail price. So for Netflix, universally available cheap internet access is a fundamental requirement for people deriving value from Netflix services. Without internet access, the product has no value.

So it is in Netflix business interests for the rest of the value chain to create and support universal and low-cost internet access. The same is true for Google, Facebook and all other app providers.

If you want to know why industry segments fight over network neutrality, it is because their business interests are at stake. The net neutrality debate is not only about business interests of particular firms and value chain segments. But it explains the positions those interests take.

Ultra-Low Latency is the Defining Characteristic of Next Era of Networks and Business Models

Eras now change so fast in the computing space that it is hard to come up with nomenclature that makes sense. It used to be easy.

In terms of platforms, we moved from mainframe to minicomputers to personal computers (and client-server) to mobile or ambient computing. Some might say the next evolution is “pervasive computing” based on widespread internet of things adoption.

In the area of core technology we moved from vacuum tubes to transistors to integrated circuits to microprocessors, graphics processors and now seem headed for an era where artificial intelligence becomes the driver.

In terms of apps, we have moved from enterprise back office to desktop productivity to internet apps on smartphones. It is the recent era that seems most diverse. Some people might say we are now in the age of mobile computing. Others might say it is more about “internet computing” or “cloud computing” or “social computing.”

Recent “ages” or “eras” change so fast we probably are not talking about ages or eras at all. Within a span of seven years, for example, we might be said to have moved through the ages of web, to search, to social, to cloud, to mobile.

Obviously we are too granular. An “age” or “era” should not be so short as to last only a year or two. That is a buzzword or a theme, certainly, but not an “age or era.”

At the risk of contributing to the confusion, we might be on the cusp of an era of ultra-low-latency networks designed to support new applications requiring such ultra-low latency, one of the defining performance characteristics of 5G.

But there are other big changes. A new edge computing infrastructure is believed necessary to support the ultra-low-latency apps for which 5G will provide the access. Inside the core network, new methods of creating virtual private networks (including network slicing) might also sometimes play a role in creating low-latency networks.

Most likely, the coming era will not be called anything like “ultra-low latency.” It simply is not catchy enough. “Era of IoT” or “ambient computing,” while not especially easy  to grasp, might make more sense.

Still, the key change is latency performance, though most casual observers will point to the huge increases in bandwidth as the defining characteristic. But when Nokia Bell Labs consultants talk about “creating time,” they are speaking broadly about latency performance, not bandwidth.

And to the extent that 5G revenue upside comes from internet of things apps (sensor connections), much of the clear upside comes in the ultra-low-latency areas, as much of the IoT sensor access requirement might be met by existing 4G or fixed connections (Wi-Fi, for example).

Many sensors will have essentially zero latency dependence, as they might report data only once a day or at specified other intervals, but with no particular dependence on latency performance.

Other applications, including autonomous vehicles, virtual or augmented reality, remote surgery or instant startup of 8K video content, might well require latency below 10 milliseconds.

source: Heavy Reading

The implications are fairly clear: if in fact the next big wave of revenue opportunity for service providers are various internet of things (sensor) applications--not humans using smartphones--the key area where 5G is unique is ultra-low latency, since 5G is specifically built to deliver ultra-low latency.

So it is not bandwidth, as such, that is the clear differentiation between pre-5G and 5G and future networks. Latency performance is where the difference exists, not bandwidth, though the increases will be significant.

Even advanced 4G networks, Wi-Fi and other networks will routinely operate in the hundreds of megabits per second to gigabit ranges, and most apps will not routinely require that much bandwidth.

It will be some time until we are able to come up with a universally-accepted nomenclature for the coming era that includes 5G and edge computing. As has been the case in the past, we will be able to characterize the eras at the component level, the computing model, the devices used or by lead applications.

And, cumbersome though it might be, latency will figure in nearly every characterization, and possibly in all descriptors. Low latency really is the key, where it comes to the business model, the key changes in architecture or revenue model changes.