U.S. Device Adoption is Near Saturation

Use of communications-dependent devices obviously has direct implications for communications service demand. So it matters that U.S. consumers now are reaching--or already have reached--saturation levels of device use.

Not to belabor the point, but device and account saturation strongly suggests that demand for new services and apps has to be created, beyond current levels of functionality for devices and connections.

That is one reason why many believe 5G is going to be different than all prior generations of mobile platforms. It will be the first platform where brand-new value, and therefore new revenue opportunities, will be created by enterprises. Consumer demand for phone functions and connecting other devices is fairly well saturated.

source: Pew Research Center

Why Nobody Releases Gigabit Take Rates, Yet

Not one U.S. internet service provider publicizes the take rates it gets for gigabit internet access. Historically, no ISPs have done so for their fastest tiers of service, either. The reason, as you might suspect, is that it is highly likely take rates for such tiers of service are rather modest, and tend to be purchased by businesses rather than consumers.

Eventually that could change, but only when purchases of gigabit access service is the mid-tier offer.

Back in the days when cable TV operators first were rolling out consumer Internet access at speeds of 100 Mbps, it was virtually impossible to get subscriber numbers from any of the providers, largely because take rates were low.

In the United Kingdom, then planning on upgrading consumer Internet access speeds to “superfast” 30 Mbps, officials complained about low demand. In fact, demand for 40 Mbps was less than expected.

So “gigabit” internet access remains mostly a marketing platform, not an indicator of what services people actually buy, when they have access to gigabit services.

Value versus price is the likely reason for consumer behavior. “Value (performance versus price)” seems to be evaluated as best in the mid ranges of internet access service, not the “fastest” grades of service. Nor is that an unusual situation for most product categories.

In Australia, in 2016, for example, perhaps 15 percent of consumers purchased the then-fastest speed tier of 100 Mbps. Some 47 percent bought the mid-range service at 25 Mbps. Some 33 percent of buyers were content with service at the slowest speed of 12 Mbps.

Likewise, even where fiber-to-home connections are available, that does not mean most consumers will buy such service, if other options also are available. Data from New Zealand suggests take rates might be 33 percent where FTTH is sold.

Price has much to do with those choices, as do perceptions of value. The safest assumption is that multi-user households are most likely to buy faster tiers of service, reasoning that the connection bandwidth has to be shared by all members of the household.

Also, since there always is a direct relationship between purchases of internet access generally with higher incomes, we should not be surprised if cost-conscious consumers opt for less-expensive packages, while higher-income consumers are most likely to buy the most-expensive packages, which also are the fastest.

The takeaway is that most consumers buy the mid-tier offers. According to Federal Communications Commission data, in 2015 the most popular advertised speed plans purchased by consumers tend to range about 100 Mbps for cable providers.

AT&T U-verse plans generally were in the 45 Mbps range in 2015, while DSL speeds (all-copper access) were quite low, in comparison. Verizon FiOS speeds were generally in the 80-Mbps range.

Over time, as speeds increase, consumers have tended to keep upgrading. But they have generally tended to buy the mid-tier services. That is what AT&T has found as it increases the top speeds available.  CenturyLink also found that to be the case.  

source: FCC  

In 2010, for example, about 40 percent of U.S. consumers were buying Internet access at about 6 Mbps. You might wonder why, but the answer is simple. In 2010, the 6-Mbps service offered what consumers then considered the best value for the money paid.

U.S. Internet Access is Not "Expensive"

One always can get a good argument about whether internet access markets in the United States are getting less competitive or more competitive. What often gets lost in such discussions are facts. Everyone is entitled to an opinion; but not their own facts.

And there are several ways to look at internet access services, in the United States or anywhere else. For starters, there is a difference between mobile access and fixed network access. Most studies of internet access globally tend to focus on “fixed network” access, even when, in many markets, most people only use mobile internet access.

Availability is one important metric: can consumers buy service? Take rates are a different matter. Even where available, not every consumer wants to buy a fixed network service. Nor do consumers tend to buy the fastest service available. Instead, they compare value with price, and almost always buy services that are “good enough,” and neither the fastest nor slowest options available.

Speeds also vary from country to country, and within countries (urban, rural), and by provider (telco, cable, satellite, fixed wireless, mobile). We always can argue about what speeds are “good enough.”

Finally, there is the matter of price. Many only look at price in absolute terms, not relative terms. In other words, they look at total price, not the price as a percentage of buyer income. That matters whenever one is making international comparisons.

source: Pew Research Center

To state what should always be obvious, prices are higher in more developed economies, and that applies to internet access prices as well. Consider mobile broadband.

Fixed network internet access prices in developed nations--measured as a percentage of gross national income--are quite low, less than one percent of gross national income per capita.

Prices for mobile internet access, as a percentage of gross national income are even lower. The point is that U.S. internet access prices, as a percentage of household income or per-capita gross domestic product, are quite low, by global standards.

In other words, U.S. internet access is not expensive.

source: Pew Research Center

Cable TV Operators Gradually Start to Compete with Each Other

Historically, cable TV companies do not compete directly with each other in the same geographic areas. That is changing a bit, though. In the United Kingdom, if Comcast completes its purchase of Sky, Sky and Liberty Global (Virgin) will compete head to head, for the first time in the U.K. market.

That is something that has happened in telecom markets, both mobile and fixed, and some have wondered how long it would be until cable companies began to compete in such a manner as well. We appear to be one step closer, in the U.K. market.

In the U.S. market, such head-to-head competition is more likely to come as cable TV companies get into the mobility business, as has been the case for U.S. telcos generally. Even when firms such as AT&T, Verizon and CenturyLink mostly have not competed against each other in the fixed network area, there has been no way to limit competition when mobile networks operate ubiquitously across the country.

That means AT&T and Verizon, for example, were early on forced to compete against each other nationwide, in the mobile arena. In the fixed networks area, they have not competed in the same territories.

That now is changing as Verizon plans a 5G fixed wireless attack in AT&T areas (out of region). But Liberty Global and Comcast now will face each other as direct competitors in the U.K. market as well. That is new.

Revenue Upside and Cost Reduction Will Drive Networks towards Edge Computing

There are three major reasons why edge computing is going to reshape networking architectures: revenue, cost and functionality.

On an internal level, network cost and functionality are shifting towards use of edge computing to support access networks in the 5G era. For starters, centralizing radio processing further into the network reduces radio cell site costs, in addition to improving flexibility.

On the revenue side, core networks will evolve towards edge computing to reduce latency, a primary requirement for creating new applications that require one-millisecond or just a few milliseconds latency.

source: Nokia

Disintermediation in the Subsea Business

“Disintermediation” is a term some attendees at the PTC Academy event in Bangkok, Sept. 20 and 21, 2018, heard for the first time. The term simply means that product and service providers go direct to end users and customers, rather than using distributors.

Since communications service providers are distributors, that has key implications. Think “over the top” and you get the point: apps go direct to customers and end users with no direct business relationship between the app/platform and the user.

To an astonishing degree, market demand for wide area communications has shifted away from telcos and to application and platform providers.

The amount of undersea traffic carried by the largest U.S. application and platform providers grew to 339 Tbps between 2013 and 2017. International capacity supplied by internet transport companies grew to 350 Tbps.

“15 years ago, 100 percent of my clients were telcos,”  said Sean Bergin, APTelecom president. “Now 80 percent of my customers are OTTs,”

source: TeleGeography

So platform and app companies Google, Facebook, Microsoft and Amazon do not yet move more bits than service providers do, but arguably will do so in the future. And that “function substitution” has happened in telecommunications before.

Though you are familiar with mobile substitution--the use of mobile networks to displace use of fixed networks--the substitution happening elsewhere is “over the top” substitution for carrier services and value.

In the undersea and wide area network business, that means enterprises of a particular type (tier-one application and platform suppliers) are creating and owning their own transmission networks, and no longer buying capacity from transport providers. And that also means disintermediation of the communications service provider.

source: Google

Put another way, wide area networks now are experiencing product substitution, as did fixed network service providers, where mobile services are preferred to fixed services. As "over the top" apps, platforms and services often displace carrier services and apps, so enterprises (app, platform, device providers) increasingly have found it makes sense to own their own global networks. 

And that means the demand for capacity services from "public" networks (telcos) is diminished. In other words, as bandwidth demand grows, the amount of growth available as "revenue for service providers" diminishes. 

source: Google

That trend can be seen clearly in the growth of transoceanic capacity that is supplied directly and internally by app and platform providers directly, on their own private networks. 

In other words, OTT now covers a much-wider range of business cases, all based on disintermediation, where producers go straight to their customers or users, without relying on distribution partners. 

source: TeleGeography

Intel Follows Pattern: Replace 1/2 of Current Revenue Sources Every Decade

One rule of thumb I use when looking at business model change is to assume that a tier-one service provider will have to replace half its current revenue with new sources every decade. And that might be a reasonable rule for suppliers of apps, platforms, devices and components as well.

Im 2012, for example, Intel earned nearly 70 percent of revenue from “PC and mobile” platforms. By 2018, PC/mobile had dropped to about half of total revenue. By 2023 or so, Intel should generate 60 percent or more of total revenue from sources other than PC/mobile.

source: Trefis

If you hear executives talking so much about innovation and new services, that is why: companies need to replace half their revenue every decade, and do so in every decade, from now on.

source: Intel

The good news is that, as tough as that sounds, firms have shown they can do so.