U.S. Fixed Network Internet Access Business Reaching Equilibrium?

The U.S. fixed network internet access business seems to be reaching an equilibrium state, as telco share losses are slowing dramatically.

At the end of the first quarter of  2019, cable TV operators had a 66 percent market share; telcos 34 percent. At the end of the first quarter of 2017, cable share was 63 percent; telco share 37 percent.

Significantly, most of the losses have been at CenturyLink, Frontier and Windstream, not AT&T and Verizon, which have in recent years held their own, not gaining much share but, importantly, not losing share, either.

But losses at CenturyLink, Frontier and Windstream have moderated.

Broadband Providers	Subscribers at end of 1Q 2019	Net Adds in 1Q 2019
Cable Companies
Comcast	27,597,000	375,000
Charter	25,687,000	428,000
Cox*	5,100,000	40,000
Altice	4,155,000	36,900
Mediacom	1,288,000	24,000
WOW (WideOpenWest)	765,900	6,300
Cable ONE	678,385	15,311
Total Top Cable	65,271,285	925,511
Phone Companies
AT&T	15,737,000	36,000
Verizon	6,973,000	12,000
CenturyLink^	4,806,000	(6,000)
Frontier	3,697,000	(38,000)
Windstream	1,032,400	11,400
Consolidated	780,720	1,750
Cincinnati Bell^^	426,700	1,100
Total Top Telco	33,452,820	18,250
Total Top Broadband	98,724,105	943,761

source: Leichtman Research

So the big issue now is whether 5G, mobile or fixed, will disrupt the market equilibrium. And, if so, when that could happen.

“I do think, three to five years out, there is a crossover point where 5G passses home broadband, and 5G has better performance than fiber,” Randall Stephenson, AT&T CEO, has said.

Some will remain skeptical, but Stephenson believes AT&T will have a truly nationwide “fiber speed” network, using either 5G or fiber, across the entire United States.

That would be historically unprecedented. The old monopoly AT&T had a nearly-ubiquitous copper network. But in the post-divestiture market, no tier-one service provider has been able to sell broadband to “nearly every U.S. household” at speeds representing optical fiber performance.

With AT&T, Verizon and also T-Mobile US all planning 5G fixed wireless efforts, the potential for disruption exists. It already appears that some optimistic forecasts of cable TV market share already are falling short. The telco erosion is not completely over. But equilibrium is approaching. Fixed wireless could be quite destabilizing, in that regard.

How Much Value from Analytics, in Telecom?

Connectivity providers overestimate the value of analytics for revenue growth and underestimate its value for optimizing operations, says Axiata Analytics Centre head Pedro Uria-Recio.

Beyond that, the upside from analytics might be quite a bit lower in the connectivity business than in other industries, according to an analysis by McKinsey consultants.

Value might be quite high in retail, travel or logistics. But value seems relatively low in the telecom industry, compared to most others.

source: McKinsey

That is not to say many “digital transformation” efforts in the connectivity business are pointless. But there also is a value for money aspect, as well as opportunity costs. How big will the return be, in measurable terms (revenue, profit)? And what else might have been done with the invested capital?

One potential example: experts have always told me there are hundreds of indicators a consumer account is about to churn. That might lead you to ask why firms do not do something with such indicators, before a customer leaves.

Perhaps the answer is that they cannot actually do very much. Maybe the customer leaves for some relatively-structural reason (poor coverage, low mobile data speeds), perceived value (some other cheaper alternative is acceptable), or there is some change in life state (family member dies) driving the account change.

How FirstNet is Boosting 4G Speeds Nationwide

AT&T has not shied away from touting the importance of its FirstNet emergency responder program, and AT&T CEO Randall Stephenson reiterated its importance at the J.P. Morgan Global Technology, Media and Communications Conference.

The company began building FirstNet in 2016, which meant the company had technicians “climbing every cell tower” in the United States. So the opportunity then became “if you have to climb those towers anyhow, what else can you do?”

One important opportunity is to install the hardware infrastructure for 5G, so that only a software upgrade is necessary to turn on a standards-based 5G network. Stephenson estimated the full network would be ready to turn on “next year, about this time (May).

Also, upgrades made as part of that effort now mean AT&T “capacity is up over 50 percent in three years,” giving AT&T the “fastest network in the United States, now.”

What could happen in three to five years is perhaps more profound. “I do think, three to five years out, there is a crossover point where 5G passses home broadband, and 5G has better performance than fiber,” Stephenson said. Some will remain skeptical, but Stephenson believes AT&T will have a truly nationwide “fiber speed” network, using either 5G or fiber, across the entire United States.

That would be historically unprecedented. The old monopoly AT&T had a nearly-ubiquitous copper network. But in the post-divestiture market, no tier-one service provider has been able to sell broadband to “nearly every U.S. household” at speeds representing optical fiber performance.

If one sets fiber-to-home performance at about 1 Gbps, that claim implies 5G network performance faster than 1 Gbps. And even if one assumes a typical performance is less than that, speeds of hundreds of gigabits per second, nationwide (at least serving 200-plus million potential customers) coverage at such speeds would be unprecedented.

Without Millimeter Wave, the Mobile Business Model Breaks

Some technology innovations are important because they either keep an existing business model from breaking, or threaten to break business models. Low earth orbit satellite constellations, in principle, represent new competition to virtually every internet service provider on the planet.

Cable modems and hybrid fiber coax have been a major means for breaking the bandwidth limitations of digital subscriber line, as advanced forms of DSL in turn extend the usefulness of copper access.

Small cell architectures have been the primary way mobile operators have intensified their use of available spectrum.

Likewise, millimeter wave spectrum might help mobile operator business models from breaking (for lack of sufficient capacity to support mobile internet access).

Verizon has faced criticism in some quarters related to the performance of its millimeter wave fixed wireless service, which remains in early commercialization. The general tenor of the critique is that signal propagation is not good enough, and take rates too low, to support the business model.

We also sometimes forget that the state of the art for fiber to the home was 10 Mbps, and that deployment costs were double what they are today.

The conclusion some seem to reach is that millimeter wave is not useful for 5G. That flies in the face of global movement to commercialize millimeter wave spectrum for 5G and all following mobile network generations. At WRC 2019, the International Telecommunications Union is looking at a wide range of millimeter wave spectrum.

In the following illustration, the width of the blue bars roughly illustrates the amount of capacity at different frequencies. The horizontal axis represents the frequency spectrum from approximately 1 GHz to 90 GHz on a relative scale (mobile services tend to use frequencies at 600 MHz to 800 MHz at the low end).

The orange bars show the approximately 11 GHz (capacity, not frequency)  of new spectrum released by the FCC for both licensed and unlicensed use. Note that the total amount of new bandwidth is orders of magnitude more than all bandwidth presently available for mobile purposes.

Europe and Asia are working towards commercialization of much of that spectrum as well.The EU recently authorized 26 GHz for 5G, for example. 

The red and green blocks show frequency allocations for the aerospace, defense and satellite communications industries, parts of which might ultimately be available using shared spectrum mechanisms.

source: Anokiwave

The point is that there will be growing pains as millimeter wave technology--never used commercially before--is deployed. But there also can be little doubt that in addition to small cell architectures, there is little additional spectrum available to accommodate growing mobile data use, except in the millimeter wave regions.

And that is why the strategic direction (use millimeter wave and small cells) Verizon is taking is correct, absolutely correct. Starting with 5G, and continuing forward, ability to support ever-higher data demand will hinge on use of millimeter wave resources.

source: Accton

Bands under consideration for mobile service on a primary basis include 24.25-27.5 GHz, 37-40.5 GHz, 42.5-43.5 GHz, 45.5-47 GHz, 47.2-50.2 GHz, 50.4-52.6 GHz, 66-76 GHz 81-86 GHz.

Bands under consideration that may require additional allocations for mobile service on a primary basis include 31.8-33.4 GHz, 40.5-42.5 GHz, 47-47.2 GHz.  

As with any major new platform, and especially for deployment of spectrum resources that in the analog era simply could not be used at all, millimeter wave platforms will go through an experience curve (learning curve). By moving early, Verizon might well get ahead of others on that experience curve. AT&T is on the same curve as well.

That is not to say other alternatives, in an ideal world, might not have been preferable. Verizon and others might well prefer mid-band solutions that are coming, but not available today.

Since capacity and coverage always are inversely related, mid-band is a blend of coverage and capacity, where low-band is better for coverage, but lacking in terms of capacity. Millimeter wave frequencies are best for capacity, worst for coverage.

Though we might prefer not to have to rely on millimeter wave assets, ultimately we have no choice. Capacity is an obvious and growing need, and there is little low-band or mid-band spectrum left to use for that purpose, absent a major reconfiguration of usage rights.

Spectrum clearing is both expensive and time consuming. And we might not have either time or sufficient capital for such major spectrum clearing.

Also, we are 10 years away from 6G, in any case, as we launch the next-generation mobile network about every decade. Millimeter wave involves no significant spectrum clearing hurdles.

Will CenturyLink Spin Off Consumer Business? Can it?

It should not be surprising that CenturyLink, which now generates perhaps 75 percent of its revenue from enterprise services, is exploring possible divestment of its consumer network operations.

The company now is a mashup of Level 3 enterprise services and the legacy consumer telecom services business. In essence, CenturyLink is too separate assets: the Level 3 global enterprise business and the sprawling U.S. local telecom business built on former Qwest and CenturyLink assets.

The problem is that many of the CenturyLink networks are rural-weighted, though the company serves a number of smaller “tier-one” cities such as Denver, Salt Lake City, Seattle, Las Vegas, Portland, Des Moines, Orlando, Phoenix and Minneapolis, for example).

“As I briefly mentioned on our fourth quarter call, we've been open to looking at assets like our consumer business,” said CEO Jeff Storey. “We have now engaged advisors to assist us in that review.”

source: S&P Global Intelligence

The issue for CenturyLink is what to do with the legacy telco assets, which are not driving company growth, and are slowly shrinking.

Over time, more of the value of fixed networks becomes its role as a backhaul mechanism for small cells, especially as cable TV operator emerge as the leaders in serving consumer customers.

But the value of fixed networks to support dense mobile networks is mostly an opportunity in the larger cities with lots of business activity and higher populations, or in the downtown cores, not so true for less-dense parts of the service territory.

In fact, it seems ever more true that the business value of a telco fixed network is mobile backhaul (part of the enterprise opportunity for any fixed network operator). If more of the revenue appears likely to be generated by enterprise services, that might call into question the value of fixed network assets serving lower-density consumer locations.

With telco market share in internet access relatively low, the amount of stranded assets has gotten to be a significant problem. The issue for CenturyLink is identifying both potential buyers with lots of capital, and a business model that calls for harvesting revenue from a declining consumer business.

Global Telecom Revenue Will Grow 0.5% Through 2023

Global spending on telecom services (including subscription TV) totaled $1.6 trillion in 2018, an increase of 0.8 percent year over year, according to IDC.

IDC expects global revenue to reach $1.66 trillion in 2023.

The mobile segment, which represented 53 percent of the total market in 2018, is set to post a compound annual growth rate (CAGR) of 1.4 percent over the 2019-2023 period.

Fixed network data service spending represented 20.5 percent of the total market in 2018, with an expected CAGR of 2.6 percent through 2023.

Video services revenue increased by seven percent in 2018 and is expected to post a CAGR of 3.7 percent by the end of 2023.

Global Regional Services 2018 Revenue, Growth
Global Region	2018 Revenue ($B)	CAGR 2018-2023 (%)
Americas	616	0.0
Asia/Pacific	512	0.8
EMEA	487	0.9
Grand Total	1,615	0.5

source: IDC

Upside from "Digital Transformation" Will be Hard to Find

One key problem when assessing the success of “digital transformation,” broadband or “economic development” programs is that there are so many simultaneous potential drivers that we cannot ever be sure what contribution any single factor has provided.

For example, one might note that European telecom companies (and their equity values) have not done as well as “technology” or “media” firms since 2007. But that also is likely true in many other regions. We cannot separate regulatory frameworks, firm decisions and strategies, underlying economic growth levels or differences in any region’s density of firms in any technology, media or telecom segment that is showing higher growth rates.

source: Bloomberg

Beyond that, even examining results at firms such as Telefonica, which most observers would agree has had an aggressive posture on “digitalization,” there is a known productivity paradox, where investments in technology do not produce measurable productivity gains, even after a decade of widespread deployment.

In fact, a recent study has shown no correlation between broadband and economic growth.

One can argue that such gains will eventually show up (though it could take a decade or more). One can argue the gains will, in fact, not show up. One might even argue we cannot measure the gains. The point is that “automating existing processes,” always the first step in applying any information technology, might not produce measurable gains.

After time, when entire business processes are retooled, it might be possible to show gains. But that takes time. We sometimes forget that Amazon, for example, was founded in 1994. But not until 2015 did Amazon pass Walmart (once the largest U.S. retailer) in terms of market value.

Some 12 years later, Amazon’s total sales were less than $11 billion, at a time when U.S. retailers had sales of $252 billion, but almost no net income. That is by choice, of course. The point is that a long passed before Amazon became a fearsome and feared competitor, using a “digital” business model.

source: peridotcapitalist.com

source: Statista

source: Amazon, Vox

Measurable gains (revenue, profit, sales) might be hard to quantify, in the retail parts of the connectivity business.