10% of Australians Buy the Fastest Tier of ISP Service

It likely remains true that most consumers do not buy the faster tier of service sold by any ISP, whether the top speed is 100 Mbps or 1,000 Mbps.

About 10 percent of Australian consumers buy the faster tier of service available on the National Broadband Network, a figure which is likely not too different from take rates for gigabit internet access services sold in the United States.

In fact, it is likely that gigabit take rates are in single digits, most consumers buying tiers of service running at slower speeds.

source: ACCC

source: ACCC data, IP Carrier analysis

5G Networks Will Not Cost as Much as Some Fear

Some have estimated the cost of building 5G as between $500 billion and $1 trillion globally. That is not as scary a number as you might think. By some estimates, annual telco capex is between $160 billion and $345 billion.

As construction of the 5G network begins, we might expect capex to climb at least a bit. Mobile capex is perhaps $160 billion, while fixed and mobile capex might be about $345 billion.

The point is that $1 trillion is about what mobile carriers spend in about six years; what the whole industry spends in perhaps three years.

source: GSMA

What will make a big difference is the ability to leverage 4G investments; phase the 5G build over time--perhaps more slowly than was the case for 4G, and take advantage of better technology, lower-cost open source technology and unlicensed spectrum assets.

source: IHS

Sometimes "More Regulation" Can Help Big Firms

One of the quite-likely outcomes of new privacy protection laws is that they will raise costs for small firms (compliance costs), making it easier for big firms to stay dominant. That invariably is the case for major legislation to regulate any industry. What often happens is that smaller firms cannot stay in business as regulatory costs rise, reducing profit margins, where large firms have market power and can pass such costs to customers.  

That might also be true for many types of regulations that are well-intended but have externalities. That, in fact, is precisely the argument made about the European Union's General Data Protection Regulation. It is the same argument made about Dodd-Frank banking regulations: it imposed compliance costs tough for small firms to bear.   

Perhaps oddly or serendipitously, rules intended to protect consumers might also protect the reputations of suppliers, even if suppliers often oppose such guidelines or laws. That might be especially true when suppliers are big, few and reliant on their reputations.

Consumer protection laws might not work so well when sellers are so many they are virtually anonymous, and when some are willing to break the laws or regulations as a routine business practice. Think about rogue telemarketers or other unethical actors, for instance.  

Complaints by consumers about their communication services is not a new issue in Australia or the United States. In Australia, new attention is being paid not only to billing, customer service and network quality issues, but now also credit and sales practices.   

New industry guidelines outline sales, credit and debt managment practices reflecting the

Telecommunications Consumer Protection (TCP) Code, the Industry code of conduct that sets out what Suppliers must do in relation to sales, billing, and credit and debt management.

The codes especially seem to protect “vulnerable” customers from upselling and cross selling that might not reflect customer needs. The guidelines also aim to ensure that credit checks essentially protect consumers from purchase of products they cannot afford.

Big firms can benefit from expanded regulation. Small firms generally do not benefit. Criminals and bad actors do not care.

Are Telcos Headed Back to Monopoly?

As telco strategies continue to diverge, a return to monopoly might be inevitable, some now speculate. In a sense, infrastructure monopoly has been a reality for some time, in fixed network services. Mobile competition has tended to be facilities based.

But retail competition based on wholesale or owned facilities poses some clear dangers.

In some mobile and fixed markets with high numbers of retail contestants, profit has been wrung out of the business to a degree that sustainable competition--at present levels--is unlikely.

In fact, some now speculate that life as a “utility,” as in the monopoly days, might be inevitable, in some markets, at the retail level. That would be a profound change.

Will monopolies emerge again, at the retail level? Many would point out that infrastructure monopolies never really went away. Instead, retail competition in the fixed networks arena has relied on a single wholesale infrastructure.

And that, in turn, means some forms of innovation cannot happen, as all wholesale customers can offer only the same products.

So what is the impact on innovation if retail communications again becomes a monopoly? Less innovation seems almost inevitable, precisely at a time when massive innovation seems to be required.

That is the big danger if retail monopoly again emerges. “In places where you had cable and fixed, you saw much more innovation,” said Philipp Nattermann, McKinsey senior partner. In large part, that is because cable and telco use different supply chains and rely on different access network technologies.

In Europe, at least some speculate that some sort of “utility regulation” might not be an entirely bad thing, bringing regulatory protection that would allow higher prices. Across the core seven large European markets, the industry not only does not meet its cost of capital, the return on capital is lower than its cost of capital, said Nettermann.

European regulators have been very good at keeping end-customer prices low. They have been less good at creating an environment where the return on capital is sufficient to cover the cost of capital.

“The number of players has a very clear inverse correlation to profitability,” said Nettermann. “European operators are significantly less profitable than their North American, their Korean, or their Japanese counterparts,” said Nettermann.

“And then you really get to a model that begins to look more like a utility, don't you?” Nettermann added.

Telcos Will Have to Make Hard Choices, Risky Bets

A reasonable argument can be made that telcos no longer can do everything they might like to do, and must make hard choices.

Most telcos will have to pick one to five areas where they can be viable platforms and then partner for everything else, Dean Bubley of Disruptive Analysis argues.

“Telcos have been in a weird place for 10 years, between pipes and platforms, and they have to decide which they want to be,” says Benoit Felten, Diffraction Analysis owner. “You can't be everything to everybody .”

Just what that really means for strategy and business focus is harder to describe. Felten says it could mean service providers do not own their infrastructure, everywhere. Bubley argues it could mean that service providers pick a few internet of things lines of businesses to pursue and basically ignore the rest.

And some service providers will have an easier task than others. Profit margins now are diverging, globally. “On a regional level, if you look at free cash flow as a proxy for that, it increased by about 100 percent in North America between 2007 and 2017 and at a similar rate in Korea and in Japan,” said  Philipp Nattermann, McKinsey senior partner.

But “there are some markets, like Europe, that are shrinking.”

Such differentiation is not especially new, in the competitive era. Many firms sell only to business customers. Some sell mobile and fixed services; others one or the other. Some sell locally; others regionally; some nationally; other regionally; some globally.

Products range from consumer and business voice to internet access to video; data center or cloud services to various forms of wide area network services. Some firms rely heavily on application revenue, many cannot.

The hardest choices of all arguably involve efforts to “move up the stack” into applications, perhaps mostly in the internet of things area.

“If you try to compete with global players without the R&D, without the developers, and without the ten-year horizon, profitability is very difficult,” said Ferry Grijpink, McKinsey senior partner.

“If I'm a well-financed operator, maybe even the incumbent, I have a fixed infrastructure in place, that's one thing,” said Nettermann. “If I'm a relatively small mobile-only player with significantly fewer resources, this challenge becomes significantly more daunting.”

“We could very well see that 5G might lead to changes in industry structure,” he said. Bubley expects a more heterogeneous mix of large and specialized providers. Others expect tier-one service providers to consolidate, massively.

Of course, that is what we already see, in many ways. Tier-one telcos long ago decided that some markets and products were simply too small, in terms of revenue potential, and too resource intensive to provide a sustainable business case.

That is why most avoid the business phone system and even hosted business voice lines of business. Most stay out of the system integration and business premises networking business. There are viable specialists in the wide area network connectivity business, the data center business, the metro fiber network business.

Specialists already are emerging in the edge computing business, industrial IoT, automotive IoT, smart cities and other IoT verticals.

And one enduring problem is that most of those businesses do not scale as easily as have consumer and business voice, internet access or even video entertainment. Tier-one telcos will need huge new revenue sources to offset declining legacy sources, and the emerging areas might not provide the needed revenue lift.

So making choices necessarily will involve the risk of making the wrong bets.

Mixed Progress Globally in 2018 Connecting the Unconnected

The goal of “everyone connected to the internet” saw mixed progress in 2018, one report suggests.  “We are seeing steady progress in the number and percentage of households connected to the Internet, narrowing the gender gap and improving accessibility for people with disabilities,” the latest Inclusive Internet Index report says.

Some might focus on a digital divide that appears to be widening at the bottom of the income pyramid, according to the latest iteration of the Inclusive Internet Index. Others would point to the progress being made.

On one hand, “growth in Internet connections is slowing, especially among the lowest income countries, and efforts to close the digital divide are stalling, in part due to declining affordability in a number of low-income countries,” the report states.

source: Inclusive Internet Index

On the other hand, mobile data affordability improved globally, thanks largely to improvements in lower-middle-income countries. However, the cost of prepaid data plans increased in 39 out of the 84 countries that were studied.

Also, networks and coverage are better. 4G coverage is better, and the connection quality of fixed broadband and mobile connections, such as download and upload speeds, has improved globally.

For example, the world’s average mobile download speed improved by 36 percent to 21.9 Mbps from 16.1 Mbps, with the biggest gains in South Asia. Lower middle-income countries have had a significant improvement of 66 percent in 4G coverage. However, low-income countries saw more-modest progress with a 22 percent improvement.

Gender gaps in Internet access are narrowing globally, led by low-income and lower-middle-income countries. In some countries, women’s Internet access actually exceeds that of men, with the Philippines, Ireland, China and Argentina having the largest majorities.

Mobile broadband subscriptions per 100 inhabitants grew just 0.3 percent so far in 2019, and in low-income countries subscriptions actually declined, the report says. \

Perhaps ironically, as 4G gets faster in developed countries, and 5G launches, the gap with the bottom of the pyramid will grow.

How Much Connectivity Revenue from IoT?

Forecasts of internet of things spending have been all over the place, but most suggest incremental connectivity revenue directly attributable to IoT will be fairly slight. At present, IoT likely represents one percent to two percent of service provider revenues, best case.  

Some forecasts suggest global IoT spending, across the whole ecosystem, will only reach $745 billion in 2019, up from the $646 billion spent in 2018, according to a new update from IDC. The research agency expects global IoT spend to gallop at double-digit annual growth until 2022, when it crosses the US$1 trillion mark.

sources: IDC, Gartner, others  

Other forecasts are about in that range as well.Bain & Co predicts that by 2020, the global market for IoT (including devices, software, hardware and services) will exceed US$470 billion. Industrial giant General Electric Corp has the biggest number so far. It says investments in the Industrial Internet of Things (IIoT) will reach US$60 trillion in the next 15 years.

And connectivity revenues are a fraction of total ecosystem revenue.