Can Charlie Ergen Do it Again?

John Chambers, former Cisco CEO, is known for his belief that the technology business is about making transitions.

There are likely many observers who believe Dish Network cannot make another transition in its business model, as Comcast, Verizon and AT&T have done in the past. People sometimes forget (or never knew) that Charlie Ergen, Dish Chairman and also chairman of Echostar, has made at least a couple of business model transitions.

He started out in business selling personal earth stations, back before there was a direct broadcast by satellite business. That business of retailing television receive only dishes existed at a time when satellite TV programmers did not encrypt their signals, allowing any owner of a TVRO earth station to watch the feeds at no incremental cost.

That was declared lawful by the Federal Communications Commission in late 1979, allowing consumers willing to put up a 20-foot reflector to watch HBO, and eventually many other satellite-delivered channels, for free.

But programmers started encrypting their signals, killing the TVRO business. So in 1990 Ergen purchased satellite orbital slots, founding EchoStar in 1993, to support a new DBS service known as Dish Network,  that arose to supply satellite TV on a paid basis to subscribers, largely in rural areas.

In the intervening years Dish Network acquired Blockbuster, the chain of video retail outlets, and then continued to acquire other satellite assets, making bids for Hulu and Sprint as well as Clearwire. Those the Hulu, Sprint and Clearwire efforts did not result in a transaction, you can see the development of thinking about business model.

Separately, EchoStar moved into decoder manufacturing and also bought Hughes Network Systems, the supplier of satellite enterprise network services,  and consumer internet access.

Most recently, Dish has amassed, by acquisition and spectrum auctions, 5G spectrum assets that now represent the future of the company.

The point is that Ergen has made at least one major successful business model transition (TVRO to DBS), with a key diversification into satellite enterprise services and consumer internet access by satellite through EchoStar.

Ergen also has attempted to become a key player in streaming (Sling TV) and mobile services.

So it arguably is clear that Ergen has seen the need for a further business model transition out of DBS and into something else for quite a while. Some would say the 95 MHz of 5G spectrum now represents nearly the entire value of Dish Network, as the DBS business continues to shrink.

Many have believed that Ergen ultimately would simply sell the spectrum, rather than try and pull off yet another major business model transition. But at least some now believe Dish has no choice but to go ahead and build a narrowband internet of things network as the foundation for its next transition.

The reason is simply that no acquirer would be likely to get transaction approval before the deadline for building an operating network using much of the spectrum purchased at auction. That has to be done by 2020 or Dish (or any other owner) loses the AWS spectrum assets.

That buildout includes a stipulation that the network be active and reach about 70 percent of U.S. population in 2020.

So it now appears Dish will have to do so, spending perhaps $1 billion to create the narrowband IoT network as a first step. The actual revenue model has not yet been talked about (Dish could operate as a wholesaler to others who want to create a national NB-IoT network, or could sell at retail to enterprise customers.

Some likely continue to think Ergen will not be successful making that sort of business transition from video entertainment provider to mobile service provider. But skeptics believed cable TV operators would not be good at programming, or that AT&T would not be all that successful as a video retailer, or that AT&T cannot be competent as a programmer.

To be sure, some still might question some parts of those theses. But video suppliers have become competent providers of communication services, while telcos now are successful video subscription suppliers, and there is no reason to doubt, in principle, that a big video subscription services supplier cannot become a competent programmer.

Ergen has made big business model transitions in the past, and he might well do so again.

Fixed Network Substitution Might be a Prime Driver of Early 5G Revenue Gains

“The vision for 5G isn't merely to make mobile connections faster or more reliable, but to provide uniform ‘fiber-like’ broadband everywhere,” says analysts at Morgan Stanley. And that might be among the big differences between 5G and all prior mobile generations, along with virtualized network slices, edge computing, ultra-low latency and support for internet of things.

But 5G also is built to interwork with many other access and connectivity platforms, including 2G, 3G, 4G, WiFi and others. It is a network of networks.

And while every mobile platform has provided more bandwidth, 5G will boost speeds by an order of magnitude to two orders of magnitude, enough to become a functional substitute for fixed network access.

Ultra-low latency means 5G can become a new platform for traffic safety, critical infrastructure and industry processes. Also, 5G will need to support, and encourage, use of devices with battery lives as much as three orders of magnitude greater.

That noted, most mobile operators are going to be rational about their 5G investments, in part because revenue upside is generally believed to be limited. Only about a fifth of industry executives actually expect that 5G will increase revenues by more than five percent. Nearly a third of executives believe revenue will grow by less than five percent. And nearly a third believe revenue will stay flat in the 5G era.

The point, of course, is that observers likely expect legacy revenues to diminish, even as new 5G revenues ramp up. So net growth might be tough. In that regard, one of the easier “new revenue source” opportunities is the ability to grow revenues by taking market share away from fixed suppliers.

source: GSMA

Mobile Substitution is About to Explode

With the caveat that it often is not feasible, facilities-based competition in telecom often results in more innovation and differentiation than a “wholesale by a single facilities provider” approach. That might be especially the case as 5G is commercialized, as mobile platforms might be able to compete head to head with fixed networks on both retail price and capacity (speed and usage) metrics.

Often, that is because facilities-based providers often use different platforms (fixed wireless, hybrid fiber coax, fiber to home, satellite, mobile), with differing capabilities, “best use” cases, maximum bandwidth and retail pricing of bandwidth.  

Each of those networks has a rather distinct capabilities profile: satellite and mobile with the lowest cost per passing, but relatively high cost per gigabyte; FTTH with the arguably greatest amount of potential bandwidth, with the highest infrastructure cost profile;  HFC offering relatively lower cost facilities compared to new FTTH networks.

Fixed wireless has been most used in rural areas, but will become a more-significant factor in some markets as 5G fixed wireless is commercialized. On a localized basis, Wi-Fi offers the lowest end user cost (often free) but rarely, if ever, the highest bandwidth.

Among the best examples so far of how facilities-based competition leads to more innovation is the use of HFC by cable operators to supply more bandwidth than telco DSL and sometimes even FTTH, at lower infrastructure cost.

That is likely to be the case as 5G fixed and mobile wireless are commercialized as well.

“We believe that prevailing incentive structures will continue to push mobile network operators to invest heavily in their own infrastructure” in Australia, as an alternative to relying on the National Broadband Network, analysts at S&P Global Ratings say.

the design of all networks is converging: the idea being to get access traffic moved as quickly as possible to the optical backbone.

“Taken to its logical conclusion, fixed and mobile networks might only be distinguishable by the "last 100 meters," S&P argues. “Both will require fiber deep into the network.

In fact, assuming a small cell network has access to lots of unlicensed spectrum and millimeter wave assets, the actual architecture resembles a fixed network access architecture: fiber close to the customer and then final connection using some non-fiber means.

Even fiber-to-home networks convert signals from optical to electrical, with actual delivery using copper media (to a Wi-Fi router, perhaps), with direct links using wireless.

Fiber-to-curb and hybrid fiber coax networks are more directly analogous, terminating the optical network someplace close to the end user, and then using some other media (copper cabling, copper wire, fixed wireless or mobile access) for final delivery.

So as small cell networks are deployed, using either fixed wireless or mobile access, they will resemble HFC and FTTH very closely.

In all cases, the design objective is to get traffic off the access network (wired or wireless) and onto the optical backbone as quickly as possible.

Still, the use of rival platforms is likely to produce more innovation than would be the case if all competitors used the same platform.

What is the Business Value of a Network Slice?

What is the business value of a network slice, the ability to create an end-to-end virtual network with features optimized to fit particular use cases on a number of dimensions?  Network slicing is the logical partitioning of a physical network into independent virtual mobile networks.

So the issue is what value various mobile operators will see to creating a multi-tenant capability. Should that extend only to the operator’s enterprise customers, or should multi-tenancy also extend to enabling rivals (as traditionally is the case for network operators selling capacity to third party competitors who want to operate mobile virtual network businesses?

The easiest case, for a network operator, is using network slicing to better support its own retail customers.

For starters, network slicing implies the ability to tune the core network features to match different use cases.

An automated vehicle control network might emphasize ultra-low latency. An industrial internet of things network might emphasize low-bandwidth and infrequent communications.

A high-end consumer internet access use case might focus most on bandwidth. Health applications might value reliability and predictability above all else.

Existing consumer mobile and fixed network services are “one-size-fits-all.” That has operating and capital cost implications since most use cases arguably result in network resources being underused (stranded).

On the other hand, some use cases might require either high-bandwidth or low-latency, but not both. Some use cases benefit from higher levels of security; others are less stringent.

So network slicing offers the hope of more efficient networks that also can be customized, to an extent, to fit specific use cases.

Each network slice can be optimized to provide the required resources and class or service or quality of service to meet the diverse set of requirements for different use cases.

Source: CableLabs

There could be other far-reaching implications, however. What network slicing could mean is “multi-tenant” use of a fixed network access facility. In other words, it should be possible for multiple independent users (enterprises, app provider or service provider) to manage their own networks over the one physical access link.

Think of the ways mobile virtual network operators now provision network resources. To be sure, capacity will be sold wholesale in some way that relates to network usage (bandwidth, for the most part). Today, MVNOs pay their suppliers based on consumption (volume).  

With network slicing, other possibilities can be envisioned. Perhaps an MVNO buys a fixed slice of capacity and use (fixed or flat fee) and then is able to tweak functionality to match its expected use cases. This might be particularly useful for a specialized MVNO serving customers with special requirements (health apps and services emphasizing class of service protections).

Perhaps an autonomous vehicle network really wants ultra-low latency, above all, and builds that into its own slice.

Also, at least in principle, some entities could consider co-investment in fiber to home facilities that share one physical link but are partitioned into multiple virtual connections. That could be a substitute for today’s practice of buying standard capacity, with charging based on usage, and a new way to share infrastructure costs without sacrificing “control and differentiation” of network features.

Put another way, could network slicing be a new way of allowing multiple service providers to share the cost of access infrastructure? Traditionally, service providers have shared physical elements such as towers, radios, metro transport or access facilities. Sharing of towers and radios has been somewhat common, in some markets, and will be a feature of South Korea mobile 5G infrastructure, for example.

Nations with a wholesale approach to facilities have had one physical network supplier and then multiple retailers using that common infrastructure.

But network slicing in the 5G era could bring substantial changes. Perhaps network slicing creates a new way for mobile operators and others to share the costs of building networks, perhaps most obviously for the half of radio sites that typically carry only about 10 percent of traffic.

Since executives are likely to want to maintain full control over any elements of their business that provide customer-facing strategic advantages, one possible driver of network slicing is to use that technique to reduce the cost of coverage for up to half of sites that carry very little traffic, and then maintaining full control over the half of radio assets that represent those portions of the network carrying 90 percent of traffic.

As always, such practices might appeal most to non-dominant or smaller service providers, since the capex savings could be significant over the approach of building an entirely-owned network. Network slicing would save the costs of negotiating site leases, not simply the cost of facilities, for example.

While useful for traditional MVNOs, the advantages are even clearer for specialized vertical-oriented MVNOs operated by non-traditional providers, who might see network slicing as a way to source a full network, instead of acquiring capacity the traditional way.

Major app or service providers whose main business is not “general purpose communications might well see many advantages to doing so.

Different actors will have differing views of the value of such arrangements. Dominant providers with leading market share might continue to favor retail operations of their own, and favor network slices for enterprise customers running their own private networks, over enabling competitors in the retail general mobile service markets.

But in some markets, new entrants might envision market entry as resource brokers, with what is essentially a “wholesale-only” model, something quite rare in the mobile business so far. In the U.S. market, that might fit some suppliers such as the proposed network being built by Dish Network.

Were that network to become a sustainable operation (if the assets are not sold), it is conceivable the network could adopt a “wholesale only” platform, using network slicing or traditional methods to support retail customers.

How Many Consumers Would Willingly Buy Internet Access at $80 a Month?

With news that the U.S. Federal Communications Commission is once again going make its annual study of U.S internet access speeds, keeping the minimum at 25 Mbps, it is worth noting that, in the first two quarters of 2018, the “mean” (average) mobile internet access speed was 27.3 Mbps, according to Ookla.

In the first two quarters of 2017, the mean fixed network speed was 64 Mbps, according to Ookla. With the normal caveats (mean is an “average”; median is the midpoint).

The point is that the FCC definition is a minimum definition, not a statement of direction, as both mobile and fixed network speeds, “on average,” already surpass that level.

Keep in mind that internet service providers operate on many different platforms, and not all the platforms can upgrade speed as “easily” as fixed network operators. One thinks of satellite operators, at least one of which would, were the minimum raised to 100 Mbps, as some already argue is needed, would not longer be able to sell a “broadband” service.

In principle, the FCC is trying to maintain a platform-agnostic metric.

To be sure, there are areas with what most would consider unacceptably slow fixed network speeds (below 10 Mbps), especially common in rural areas.  

And many would argue prices are too high. The point is that U.S. ISPs are making rapid progress on speeds available to most potential buyers.

The FCC report does not stake out new ground on aspirational levels of speed; that is happening in the market, in any case. What the FCC wants to do is set minimum expectations that all the platforms can reasonably expect to deliver, not the “maximums.”

source: PCmag

source: Ookla

By way of comparison, advocates of adopting a minimum definition of “broadband” at 100 Mbps might not be so clear on consumer willingness to pay for such speeds. One recent study suggests demand for 100 Mbps, at current pricing levels of roughly $65 a month, is close to the maximum most consumers are willing to pay.

As much as 75 percent of all consumers might refuse to pay that much for an internet access service.

Consumers seem to evaluate internet access offers the same as any other product, which is to say they compare value to price. And that means most consumers do not buy the most-expensive, fastest service, but tend to pick services that offer high enough value, at a reasonable enough price. In other words, they tend to buy the good enough service because it costs less than the “best possible” service, sold at premium prices.

“We find that households’ valuation of bandwidth is highly concave, with relatively little added value beyond 100 Mbps,” researchers assert in one study. “For example, households are willing to pay about $2.34 per Mbps ($14 total) monthly to increase bandwidth from 4 Mbps to 10 Mbps, $1.57 per Mbps ($24) to increase from 10 to 25 Mbps, and only $0.02 per Mbps ($19) for an increase from 100 Mbps to 1000 Mbps,” the authors say.

“As with the PC, one could again reasonably ask whether bandwidth increases continue to generate substantial value for consumers,” researchers at the Technology Policy Institute say. “Consumers highly value bandwidth enhancements at lower speeds, but the incremental value of bandwidth decreases rapidly” as speeds increase.

Since few consumers think about their internet access purchases in “dollars per Mbps,” the more relevant graph is that which shows willingness to pay for bandwidth at various speeds. Though total demand continues to increase from about 150 Mbps up to a gigabit, most of the demand is at 150 Mbps and below, TPI surveys have found.

source: Technology Policy Institute

One way of parsing this data is that about half the total demand is for service costing about $40 a month, while the overwhelming majority of consumers seem resistant to pay more than about $70 a month.

As you might expect, consumers value bigger usage allowances and lower latency, and appear willing to pay some incremental fees to get reduced latency and bigger usage allowances. Still, there also is reluctance to spend more than $80 per month for service, no matter how fast the service is.

Consumer Willingness to Pay for Gigabit Has Sharp Limits

Consumers seem to evaluate internet access offers the same as any other product, which is to say they compare value to price. And that means most consumers do not buy the most-expensive, fastest service, but tend to pick services that offer high enough value, at a reasonable enough price. In other words, they tend to buy the good enough service because it costs less than the “best possible” service, sold at premium prices.

“We find that households’ valuation of bandwidth is highly concave, with relatively little added value beyond 100 Mbps,” researchers assert in one study. “For example, households are willing to pay about $2.34 per Mbps ($14 total) monthly to increase bandwidth from 4 Mbps to 10 Mbps, $1.57 per Mbps ($24) to increase from 10 to 25 Mbps, and only $0.02 per Mbps ($19) for an increase from 100 Mbps to 1000 Mbps,” the authors say.

“As with the PC, one could again reasonably ask whether bandwidth increases continue to generate substantial value for consumers,” researchers at the Technology Policy Institute say. “Consumers highly value bandwidth enhancements at lower speeds, but the incremental value of bandwidth decreases rapidly” as speeds increase.

Since few consumers think about their internet access purchases in “dollars per Mbps,” the more relevant graph is that which shows willingness to pay for bandwidth at various speeds. Though total demand continues to increase from about 150 Mbps up to a gigabit, most of the demand is at 150 Mbps and below, TPI surveys have found.

source: Technology Policy Institute

One way of parsing this data is that about half the total demand is for service costing about $40 a month, while the overwhelming majority of consumers seem resistant to pay more than about $70 a month.

As you might expect, consumers value bigger usage allowances and lower latency, and appear willing to pay some incremental fees to get reduced latency and bigger usage allowances. Still, there also is reluctance to spend more than $80 per month for service, no matter how fast the service is.

Will Network Slicing Become a Substitute for Access Networks?

We often think of network slicing as a capability to be used by 5G networks to create virtual private networks all the way through the core of the network and sustained at the radio edges as well, so that VPN features flow through to end user devices.

In principle, though, network slicing will have to flow through fixed network edge devices as well (fiber to home and cable modem, for example).

Vodafone and Huawei have demonstrated network slicing over a fiber to home access network, for example.  

What network slicing could mean is “multi-tenant” use of a fixed network access facility. In other words, it should be possible for multiple independent users (enterprises) to manage their own networks over the one physical access link.

Also, at least in principle, some entities could consider co-investment in fiber to home facilities that share one physical link but are partitioned into multiple virtual connections. That would be an extension of the present practice in some countries of having one network services wholesaler and then any number of retail service providers operating over the single infrastructure.

Whether service providers in any particular market would consider such a move hinges on their perceptions of strategic advantage, network ownership and control, and the business model advantages.  

It might seem far fetched to expect U.S. cable operators, AT&T or Verizon to ever deliver their mission-critical retail apps over leased local access infrastructure. Smaller providers might reach different conclusions.

On the other hand, when network slicing gets to be nearly ubiquitous, the decision matrix could change, at the margin. Larger tier-one service providers operating their own big backbone networks, virtualized and with network slicing, might have little need to rely on third-party access facilities in region, or across their own mobile infrastructures.

Some argument might be made that a network slice makes sense out of the fixed network region, if and when the mobile network cannot itself do this. But those cases should ultimately be quite rare for the likes of Verizon and AT&T. It is not yet so clear whether such options will make more sense for Sprint, T-Mobile US or other mobile providers.

Fixed network providers operating out of region will have to look at the business case for buying a slice, versus building or leasing access.

The point is that access network strategy will have more variables as network slicing becomes a  commercial reality.