Does Faster Internet Access Cause Economic Growth?

It always is difficult to assess the potential impact of faster internet access in any area. “Areas that receive investment in infrastructure tend to do so because they are expected to grow rapidly in the future,” say researchers at Ipsos MORI.

The point is that investment follows growth potential. So investment might not “cause” growth, but reflects expectations for growth. And that might be an issue with any studies that suggest faster internet access causes economic growth.

The relationship could be merely correlative.

Researchers estimate that U.K. government support for “Superfast” (24 Mbps or faster) internet access between 2011 and 2016 lead to 2.5 million premises getting such speeds that would not have done so without the program. On average, speeds were boosted from about 20 Mbps up to more than 60 Mbps, the report says.

Perhaps another one million premises received superfast coverage one to two years earlier than they would have done otherwise, a report by Ipsos MORI says.

The perhaps more-controversial or potentially disputable portions of the report deal with economic growth outcomes.

source: BDUK

“It is estimated that postcodes benefitting from subsidized coverage saw employment rise by 0.8 percent and turnover grow by 1.2 percent in response to improved infrastructure,” the report says.

Some 49,000 additional jobs were created in areas that got 30 Mbps or faster services. “The total turnover of firms located on those postcodes also expanded by almost £9.0bn (per year) in response to the upgraded infrastructure,” the report argues.

“The productivity of local economic activity, as approximated by turnover per worker, also increased by 0.32 percent as a result of faster available download and upload speeds, accounting for £2.1bn of overall turnover growth,” the authors assert.

“Over 80 percent of these impacts were driven by the relocation of firms to postcodes receiving subsidized coverage,” the report says.

The estimates are fine as far as they go, but arguably overstate the benefits. To sure sure, the faster internet might actually be “causal” if the firm relocations actually were triggered by the availability of faster internet access.

But other areas then also lost those firms, so the net national gain is arguably close to zero, for the activity gained and lost, in local areas. Report authors specifically say they have not discounted the impact of firms relocating from the analysis.

“Making superfast broadband speeds available also appeared to raise the productivity of firms that did not change location while the program was delivered,” the report says, and that is a possibly more-significant finding.

“It was estimated that subsidized coverage raised the turnover per worker of these firms by 0.38 percent, broadly consistent with other estimates of the impact of faster broadband in the UK, equivalent to £1,390 in output per firm per annum,” the report says.

“Assuming the results reflect underlying efficiency improvements,” it is estimated that the program led to a net increase in national economic output (GVA) of £690m by June 20166. The key word there is “assuming.” We do not actually know if the increase happened, or if it did, that those increases can be causally related to faster internet access speeds.

Subsidized coverage also supported “reductions in unemployment in the areas benefiting from the program.” That is probably what one would expect if a number of new firms relocated to the subsidized coverage areas.

It always is difficult to prove causation in such cases, to be sure.

Everything as a Service is a Great Notion; How to Service Providers Make Sense of It?

It probably does not help communications service providers much that some believe the future of business is "subscriptions," not products as such. After all, that is what "service" providers already do.

The notion is more useful for other businesses that traditionally sell "products." The shift from shrink-wrapped enterprise software to cloud-based subscriptions obvious makes sense to software industry suppliers. How well, and how extensively it works in other industries will have to be worked out.

Internet service providers, telcos, cable companies, satellite service providers and other "service" providing entities will have to work much harder to figure out what this might mean.

To be sure, there are other ways to characterize the shift: product focus to customer focus; linear to interactive and dynamic relationships; product to service; products or ownership  to outcomes; one-time revenue to recurring revenue; owning to renting, as described in Subscribed.

Of course, communications service providers have to figure out what to do if their core business always has been “services” rather than “products,” using rather than owning, recurring revenue rather than one-time product sales.

That is why “everything as a service” possibly is more challenging to apply in the communications business, as in the airline, some media or content and many other “services” companies.

“X” as a service might portend bigger business model changes for the auto industry, which always has sold cars (products), as some big auto companies might--or will-transition to a focus on being “transportation” companies, possibly combining many modes as a seamless offer (cars, trains, planes, local transit, lodging, other amenities).

Perhaps you have pondered the phrase “communications as a service,” used to describe enterprise or business hosted voice services. It works as a way of describing hosted voice rather than ownership of a private branch exchange (business phone system).

It is almost nonsensical as applied to consumer services, which always are services.

It perhaps is obvious to former product suppliers in the computing, application and other intangible product areas that the shift to cloud-based software, from seat licenses, also means a shift to recurring revenue rather than sales of shrink-wrapped software. That is the big “shift to subscriptions” thesis.

How subscriptions (renting rather than owning; on-demand usage rather than ownership; monetizing latent resources) apply to physical products continues to develop). In a sense, Airbnb and Uber make more efficient use of latent resources, with digital interfaces, but still are similar to taking a taxi ride or renting a hotel room.

But there also are other nuances. The big shift described in Subscribed is that traditional product suppliers do not really have much actual knowledge about their actual users. “Subscription companies know their customers,” it is said, have “ongoing one-on-one relationships” with their customers.

Few communications suppliers would agree too much with that argument. Communications services are sold to customers as subscriptions, but there is little one-to-one relationship, little serious knowledge of end user behavior and preferences beyond the use of communications of various types at various places and times.

Nor is it too clear how communications service providers, in their communications roles, can create more one-to-one relationship intensity. That might arguably be true for service provider owned content services, to customize and target advertising. But that is a function of the media role, not the communications role, as such.

In fact, traditional service providers might well find that there is not so much value to be created by intensifying the “subscription” business model itself. What might matter is the ability to bundle products (sensors) with analytics, to create information products to sell to third parties. In other words, creating cross-selling and upselling opportunities.

But that is not the same as saying there are many easy ways to create more “one-on-one intimacy with customers” in the communications sphere, per se.  

S Curves Only Apply to Successful Innovations

Some generally-useful visualizations, such as the S curve, require some qualification. You may think of the S curve as showing the technology life cycle, a product life cycle or an innovation life cycle. The basic idea is that adoption starts slow, hits an inflection point featuring fast growth, but eventually reaches saturation as nearly every potential user or buyer already has become a user or customer.

source: galsinsights

The major qualification is that the S curve applies to innovations, products or processes that succeed in the market. Unsuccessful innovations simply die. Perhaps they go parabolic before they die. The point is that S curves refer only to products, technology and services that actually succeed in the marketplace.

It probably is worth noting that something similar exists for hyped technologies as tracked by the Gartner Group. Between 2017 and 2018, some nine technologies simply disappeared. That is perhaps a good illustration of unfulfilled hype.

source: Gartner

source: Gartner

Live TV is the Next Big Growth Opportunity for Streaming Video

“Live TV” is the new focus for over-the-top streaming video, one might well argue. The reason is that the non-linear, on-demand services (Netflix, Prime, Hulu and others) have begun reaching saturation. What is left largely unfulfilled are “live video” streaming services that mostly represent OTT “skinny bundles” featuring real-time TV programming that are very-direct replacements for linear subscription TV (cable TV, telco or satellite-delivered subscriptions).

Though almost no consumers will ever call them by their bureaucratic name, such virtual “multichannel video programming distributors” (virtual MVPDs) are the new growth opportunity in the consumer video streaming area.

In April 2018, just five percent (4.9 million) of U.S. households streamed content from vMVPDs on their television screens (as opposed to their mobiles, tablets or PCs, perhaps?). That is a 58 percent increase in households from the year before, according to comScore.

Consider the number of subscribers to OTT real-time TV services, compared to subscriptions for Netflix, Amazon Prime and Hulu, for example. In the first quarter of 2018, Netflix had some 54 million U.S. subscribers. Prime Video subs are north of 26 million. Hulu has something more than 20 million accounts, and might be considered a live streaming service as well (though that is not how some of use it).

But the next big wave of growth will come from “live TV” services such as DirecTV Now, which essentially are substitutes for traditional cable TV, telco TV or satellite TV services, but delivered over the top, using the internet.

DirecTV Now, by way of comparison, might hit about 2.8 million accounts by the end of 2018. U.S. live TV streaming services that replace linear subscription TV will hit a combined 9.2 million U.S. subscribers by the end of 2018 and 24 million by the end of 2022, according to analyst John Hodulik.

DirecTV Now, Hulu with Live TV and YouTube TV are projected to be the big gainers over the next five years, Hodulik believes. In large part, that is because traditional linear TV subscriptions still number more than  91.3 million accounts.

So substitute products for traditional subscription TV arguably represent a bigger unfulfilled segment of the business.

But we are going to need less-clumsy nomenclature, to distinguish between OTT “live” TV and on-demand services, as they are different products, fulfilling different needs.

Software Drives Hardware Demand; Video Drives Internet Access Demand

“The value of software to stoke demand for new hardware was as old as personal computing itself,” says says Daniel Eran Dilger, who writes for AppleInsider.  “Everyone in the industry was already aware that Apple II systems first sold in the 1970s because of VisiCalc; that PageMaker had initially driven sales of Macs in the 1980s, that Office had primed Windows PCs in the 1990s.”

LIkewise, one might argue that Apple’s content ecosystem was among the reasons for Apple’s possibly improbable ascent and longevity in the consumer hardware business.

So it might be an unusual stretch to argue that efforts by telcos and cable companies to move from “mere” distribution to  “content ownership,” as Apple has moved from “mere” hardware to software ecosystem, are similar. Content and apps drive sales of hardware. Perhaps likewise, content drives sales of internet access (bundles, for example) and mobility (streaming video bundled with mobile internet).

Whether the path of application (content) ownership, or simply curation, is “better” might be a bit beside the point. Apple both curates and owns apps. It distributes through iTunes without ownership of content, but it also creates and owns Siri and other apps. On the other hand, creation of original content seems to be assuming new importance for Apple as it has for video distributors.

A distributor can wring only so much revenue and profit out of content that is freely licensed to multiple distributors. And Netflix now has demonstrated the power of original content to drive subscriptions.

Netflix also has shown the power of occupying multiple roles within the ecosystem: a “studio” (developing content) as well as a “network” (Netflix the branded “channel” like HBO) and also distributor (Netflix as a replacement for cable TV subscriptions).

In that sense, Verizon and AT&T are emphasizing different strategies with regard to video, for reasons related to their existing assets and positions in the current ecosystem. Verizon does not appear to believe that the video distributor business (linear or streaming) is as strategic as does AT&T.

There may be internal cultural factors at work. Some might argue that neither Verizon or AT&T have had overwhelming success with their homegrown video services, linear or over the top.

Verizon always has emphasized the “quality of its network” (fixed and mobile), it arguably has been difficult for organization priorities to deviate much from the “best network” mindset, with its emphasis on the network.

AT&T arguably has had the reverse problem: it has so many locations, and so many that are rural or low density, that it has struggled to develop a consistent business case for fiber to home upgrades, when capital has been needed to support the mobile business, which has driven growth for more than a decade.

The point is that opportunities for revenue growth in the near term are different. Verizon can grow by taking market share away from “bigger” competitors (in the fixed network business). AT&T, as the largest linear video distributor, cannot do so. For AT&T, diversifying elsewhere in the ecosystem offers higher returns.

Geographic coverage therefore explains and shapes strategy. Verizon’s fixed network passes far fewer households than AT&T, Comcast or Charter Communications. So strategy might follow beliefs about assets. Verizon might believe it will not benefit as much in the upside from such ownership as others might. AT&T, Comcast and Charter each pass between 50 million and 65 million U.S. homes. Verizon passes perhaps 27 million. Verizon has the smallest footprint of those four fixed network firms, by far.

That also means Verizon’s ability to create an base of subscribers--and audience--is smaller. Though all the firms believe video offerings are important, AT&T arguably has more to gain in the video area. It already is the largest U.S. video linear services provider, and with Comcast, are the biggest in content asset ownership.

So if a video subscription business benefits from scale, Verizon benefits less than AT&T, Charter or Comcast in the video subscription product segment.

On the other hand, Verizon can realistically hope to grow its revenues by taking video share and internet access share away from those other competitors as it deploys its 5G networks (fixed and mobile). Fundamentally, that was the strategic rationale for cable TV operators in the voice market: cable operators could simply take market share from telcos in an existing business where the telco had nearly all the market to itself (mobility aside).

But all four U.S. national mobile service providers now believe video services play an important role in their 5G strategies, with a range of views based on where each firm sees its own assets.

AT&T and Verizon believe advertising is going to be an important revenue driver for them; Sprint and T-Mobile US do not. That makes sense, so far, as AT&T and Verizon have much-larger customer bases, and “eyeballs” matter for advertising.

AT&T clearly believes most in content ownership; its strategy resembling that of Comcast most. The other mobile companies do not believe they can viably pursue that role, and Verizon claims it does not believe content ownership is necessary.

S&P Communications Index Reflects Cross-Industry Convergence

On September 28, S&P Dow Jones Indices and GICS will create a new sector for tech, media, and telecoms companies. "The lines among media, communications, and content are blurred," David Blitzer, chairman of the index committee at S&P Dow Jones Indices, said. "It is time to acknowledge this convergence and the overlapping services these companies provide."

It will only have 60 components, making it the eighth-largest by this metric. However, those components will include some of the biggest stocks on the market. Walt Disney Co., Netflix, Facebook, Alphabet, Comcast Corp., AT&T, Verizon, CenturyLink and others, such as 21st Century Fox, TripAdvisor and Electronic Arts.

source: Morgan Stanley

“The last several years have seen an evolution in the mode in which people communicate and access entertainment content and other information,” S&P Global says. “This evolution is a result of the integration between telecommunications, media, and internet companies.”

source: Morgan Stanley

Platforms Really Do Matter

Soon enough, we will be trying to make predictions about the impact of 5G on fixed network internet access lines, on end user typical speeds, typical retail prices, video entertainment accounts and service provider market shares. It is going to keep us busy, as few trends will be stable.

And platforms really do matter.

It is hard to overemphasize the importance the cable industry has had in driving U.S. internet access services. Cable has been the market share leader since about 2000. Telco fiber to home connections have grown, but growth has been relatively slow. Digital subscriber line has declined, with satellite connections reaching a peak of about three million before seemingly settling back to about two million accounts.

source: USTelecom

Many of us believe 5G will be a bigger platform innovation that cable's hybrid fiber coax network was.

One basic rule I use when evaluating service provider business models is to assume that tier-one service providers lose about half their current revenue about every 10 years, and therefore have to replace more than that amount of revenue to sustain growth. The rule likely works even for small independent service providers (I haven’t tried to quantify that historically, mostly because I do not have access to enough data).

source: USTelecom

It is easy enough to quantify what happened in the U.S. voice market. By 2000, mobile already represented about 34 percent of all voice lines, though arguably these were additional to the installed base of fixed network lines.

By 2018, fixed network providers have perhaps 25 percent of total lines, while mobility represents 75 percent of accounts. And in 2018, it is clear that mobile has become a substitute for fixed line voice service.

source: USTelecom

We saw this trend in long distance services, various enterprise data services, fixed network voice, now mobile voice and messaging, entertainment video and even glimmers in the internet access area.

As 5G is commercialized, we almost certainly will see mobile substitution for fixed network internet access, though it is hard to quantify the amount of change. But voice substitution provides possible guidance.

In the U.S. market, a substantial portion of U.S. consumers now rely exclusively on mobile internet access. In fact, such mobile substitution already represent as much as 20 percent of U.S. households, says the CTIA. In some segments, such substitution might be higher, as much as 35 percent.

source: CTIA

So one might ask the question of how much further that trend can go, as 5G is commercialized, and major service providers begin to actively market 5G-based services that compete directly with fixed network internet access services.

We already know what happened with voice. The portion of U.S. households that rely on mobile-only  telephone service grew from three percent in 2003 to 53 percent in 2016, US Telecom says, using Federal Communications Commission data.

So it would not be far fetched to suggest that at least half of all existing fixed network internet access connections could eventually be replaced by wireless or mobile alternatives.