5G Has Different Value for Consumers and Suppliers

For most consumer mobility apps, 5G represents not so much an experience changer as an experience-maintaining development. While some new use cases will probably depend on both 5G and edge computing, the value of 5G for most consumer smartphone apps is that it allows the network to support ever-increasing data consumption.

For most use cases, 4G latency performance and speeds are likely not a problem. What is a problem is the cost of usage. Consumers are price resistant for all products, but likely especially so for data usage charges. No matter how much data they consume, customers tend to budget only so much for that product.

spending as a percentage of total disposal income does not change much, from year to year. To the extent that increases in purchases have happened, those boosts have been accompanied by decreases in purchase of some other product. To spend more on mobility, consumers have chosen to spend less on fixed network services, for example.

So a linear increase in cost-per-gigabyte consumed is not possible. But that is why 5G is essential: it is a way to keep supplying bandwidth at lower costs per bit, to maintain supplier profit margins.

In some cases, cheaper cost per bit also enables new use cases. That especially is true for fixed wireless use cases, where cost per bit for mobile solutions has to drop by an order of magnitude, compared to fixed alternatives.

Not so long ago, mobile data prices were so high, compared to fixed costs, that full substitution was mostly unthinkable.

source: Mobile Experts

That said, the trend is clear: since the 2G era, mobile bandwidth costs have fallen by more than 90 percent. In some markets, while the gap with fixed alternatives remains about an order of magnitude, that could change in the 5G era, especially where fixed wireless is possible.

source: Mobile Experts

That is far less true for 5G appeal in the area of enterprise use cases, where very-low-latency, edge computing and ultra-high bandwidth might enable new use cases.

This forecast developed by ABI Research for Interdigital shows as well as anything the potential revenues to be generated by 5G. Note the importance of industrial revenue, compared to consumer revenue.

In this context, “industrial” revenue includes smart cities use cases. “New types of services, especially in cities and smart cities, will likely come faster when 5G becomes a consistent connectivity and processing platform,” say ABI researchers.

source: ABI Research, Interdigital

“The proliferation of connected cameras and sensors around a city, in combination with 5G connectivity and edge computing, will allow for a much more comprehensive security solution deployed throughout cities,” ABI Research says. “It is almost certain that edge computing will be deployed first in cities, and coupled with 5G, it can allow for smart transport applications.”

Every mobile generation since the first analog network has enabled new use cases and applications. In business markets, for example, 2G enabled what we now tend to call “internet of things” apps for monitoring industrial processed. During the 3G era use cases expanded to remote site data backups and kiosks. In the 4G era video surveillance became practical.

source: Digi.com

So the 5G focus on new use cases in the internet of things space are not misplaced. Of course, it is not simply the characteristics of the network but also cost per bit and other terms and conditions of use that help create new use cases.

In the 3G era I would not have considered using the mobile network full time as my primary internet access connection for work. Speed was too low and cost per bit too high. That changed in the 4G era, when I actually did replace a fixed connection with 4G.

To be sure, the use case was not “connect all the users in the home.” That remains to this day a fixed network solution, in large part because the main driver of demand is streaming video. But to support my own work needs, especially given the amount of mobility, 4G was a good choice.

Still, more important shifts tend to take time, at least in part because full deployment and advanced versions of the network will take some time.

But one of the nuances of 5G is that, for most consumer applications, the 4G network is going to be satisfactory, while Advanced 4G (LTE-A) is going to to support nearly every consumer 5G smartphone-based experience requirement.

So advanced 4G is going to be important as a way of maintaining continuity of experience as users bounce between 5G and 4G networks. Nobody wants to experience what used to happen in dropping from an area of 3G to an area of 2G, for example. For some of us, that same experience happened when dropping from 4G back to 3G.

There is reason to hope the switch from 5G to 4G will not be as abrupt, simply because consumer mobile app experience might not be noticeable when speed drops from 100 Mbps to 30 Mbps.

Still, gaming, virtual reality and augmented realitt seem to be the areas where some consumers might find 5G does actually provide improved experience.

source: GSMA Intelligence

For most of us, the transition to 5G will come more slowly, as the need to replace handsets results in acquisition of devices that can use 5G. In other words, for many, the new handset pulls with it the incentive and means to use 5G.

What remains to be seen is how soon that transition occurs, and when new use cases start to emerge. As a consumer smartphone user, the advantage seems less than was the case for migrating from 3G to 4G. Both 4G and advanced 4G seem more than adequate for my needs, at the moment.

How Will Verizon and AT&T Stave Off Attacks from the Rest of the Ecosystem?

Reasonable people can, and do, disagree about the wisdom of AT&T’s acquisitions of DirecTV and Time Warner. In fact, it is likely easier to find opponents than supporters of each move.

Many argue AT&T should be more like Verizon, and stick to mobile, or connectivity services. That’s a reasonable argument, but some would argue Verizon has different legacy assets, and therefore can pursue different revenue strategies than AT&T.

For starters, the fixed network no longer drives growth for anybody.

Verizon simply cannot grow very much in its fixed network business, so one might argue the emphasis on mobile makes sense. On the other hand, Verizon cannot grow that much in mobility, either, given market maturity.

AT&T also cannot grow very much in mobility, competing against Verizon as the leader, and T-Mobile and Sprint as the challengers.

Both Verizon and AT&T must find revenue growth, though, to fund their dividend payments. And that is where the issue of strategy becomes so perplexing. Verizon has managed its debt better than AT&T by restricting its ambitions.

AT&T has chosen to grow into new parts of the ecosystem, at the cost of high debt positions.

In the near term, financial analysts tend to prefer Verizon’s approach, and many think AT&T should retrench.

Being someone who believes the long-term trends are for connectivity prices to continue to dip towards zero, and with competition impinging on legacy revenue models, I do not believe a “stick to your connectivity knitting” approach is workable, long term.

Organic growth will be extremely difficult to maintain, and that, to me, means acquisitions will be necessary. The issue is what sorts of acquisitions are possible.

For a substantial amount of time, both AT&T and Verizon got a majority of their growth from acquisitions. In fact, the additional scale also played a meaningful part in organic growth.

Recently, Verizon has tried to grow organically, while AT&T has made acquisitions to reshape the company’s revenue streams outside connectivity.

source: Deloitte

Many do not like AT&T’s moves.

But we might ask a simple long term question: how is it safe for “connectivity services” providers to entrench in that sole role when the whole rest of the ecosystem is moving across it? It is not easy. It will be dangerous. But what is more dangerous than staying in one silo whose revenue is not growing, when profit margins continuously drop, and when competitors from other parts of the ecosystem are moving to displace the pure connectivity role.

source: Jackdaw Research

Among the other issues is the declining financial return from each next-generation mobile platform, at least in terms of the number of years of useful life obtained from each platform. Simply, return on assets has been falling, in part because each network has a shorter useful life.

source: Innosight

And if we know anything about the modern telecom business, it is that organic growth, while still important, does not tend, over time, to drive total revenue growth. To me, that means acquisitions are necessary.

source: JackDaw Research

We may disagree about which acquisitions make sense (horizontal, vertical, internationally or domestic). It seems much less contentious to argue that future acquisitions will be necessary.

As far as the wisdon of the DirecTV and Time Warner acquisitions, I have yet to see any clear evidence--from those who think AT&T should not have made one or both of those buys--that some other deployment of capital, or not spending, for that matter, would have had a better outcome for AT&T in the revenue and free cash flow areas, near term.

Hulu and YouTube TV Might be Among Biggest Streaming Winners

Hulu and YouTube are among the bigger winners in streaming video by 2022, Business Insider predicts. Sling TV and Playstation Vue are among the big losers. We might note that both Hulu and YouTube TV are anchored by their “live TV” (linear)  content.

We sometimes forget that the legacy subscription TV business (cable, telco, satellite TV) is itself an amalgam of “live” and “pre-recorded” content. The paramount examples of “live” content being “sports and news;” the best example of pre-recorded content being movie services.

In the streaming era we will see lots of niches recreated out of legacy content formats, including services that emphasize pre-recorded content; some that emphasize “live content” (sports networks, news) and many that recreate in a streaming format today’s mix of channels.

The “live streaming” segment of the market will include the specialized sports and news venues, plus what we tend to call “skinny bundles” of channels that resemble subscription TV but offer fewer channels.

Some services, including Netflix, might continue to thrive using the pre-recorded content model. Sling TV might be the original skinny bundle supplier. But there is lots of new competition coming in that segment from Hulu, DirecTV Now, YouTube TV and others.

source: Business Insider

Where Will Highest Revenue Growth Happen in Telecom, Through 2023?

With the caveat that aggregate global trends can conceal local differences, the highest-growth products in the communications business through 2023 are streaming video, mobile internet and video games. Traditional subscription television growth will be zero, while fixed broadband will grow at two-percent compound annual rates.

source: PwC

What Happens Next in Telecom Industry?

Looking at market share held by the largest three companies in the industry, one can clearly see that industry consolidation rises over time. The existential danger is the bend of the S curve late in the cycle, which shows loss of market share to new competitors or products.

For telecom service providers, the danger is that late-cycle shrinking of the core market.

Eventually, the S-curve suggests, entire markets become unstable, and can shrink, because of changes in technology, customer demand and business model evolution, almost always from outside the traditional boundaries of the industry.

source: AT Kearney

We already have seen this for key segments of the telecom industry, where long distance revenues changed from high margin, high volume to low margin, low volume. We have seen the shrinkage of fixed network voice lines in many developed markets, lower profit margins and revenue from mobile voice and messaging.

At the same time, mobility has assumed the role of driver of industry results globally, while internet access and video services have replaced some of the losses from voice services.

That sort of product replacement is normal.

The big industry question is what replaces mobility as the industry driver, as mobility growth reaches saturation.

Between 2009 and 2019, Internet Access PPI Prices Fell, CPI was Flat

This chart shows the producer price index for U.S. internet access services between 2009 and 2019. The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services, according to the U.S. Bureau of Labor Statistics.

The Consumer Price Index measures price change from the purchaser's perspective. Sellers' and purchasers' prices may differ due to government subsidies, sales and excise taxes, and distribution costs.

source: Bureau of Labor Statistics

The importance of the PPI data is that the “cost” of internet access has fallen over the 2009 to 2019 period, before service provider non-controllable costs such as taxes are added.

The importance of the PPI data is that the “cost” of internet access has fallen over the 2009 to 2019 period, before service provider non-controllable costs such as taxes are added. The same time period, looked at from the Consumer Price Index, shows what end users pay, including taxes that are part of the cost of the product.

source: BLS

Including taxes, the cost of internet access between 2009 and 2019 has remained flat.

Can, Should AT&T Divest DirecTV?

By some estimates, AT&T free cash flow overall is about 14 cents for every dollar of revenue, while Verizon earns 16 cents per dollar of revenue. So some worry about the cash flow generating capability of AT&T’s DirecTV business, which most reasonably expect to drop over time.

Some even speculate that AT&T would be better off selling DirecTV.

That might not be an easy decision. DirecTV still represents per quarter, or roughly $32 billion worth of annual revenue and probably $2 billion per quarter of free cash flow, $8 billion annually. For a firm whose financial model is based on high dividend payments, free cash flow to pay those dividends really does matter.

source: Business Insider

source: Bloomberg

Beyond all that, does it really make sense that AT&T, whose new positioning is a “modern media company, really want to chop media revenue and cash flow to reduce debt, as important as that is? Does AT&T really want to lose the bundling and churn-reduction advantages it seemingly reaps from offering video plus internet plus mobility?

Even if Time Warner arguably represents the future of AT&T’s video streaming efforts, there is no way revenues and cash flow from streaming can replace the linear video business anytime soon.

Some believe AT&T should have spent its cash on something else, such as more fiber-to-home deployments, for example. Few believe there was any way for AT&T to expand by growing its mobile or fixed network assets inside the United States.

But for some of us, that is the primary issue: can AT&T wring much more revenue out of its fixed and mobile footprint? An argument can be made that more FTTH investments would not provide the revenue or cash flow lift of acquisitions such as DirecTV or Time Warner. In fact, some would argue higher returns, and better strategic value, is possible only elsewhere in the ecosystem.

We can argue about the merits of the DirecTV and Time Warner acquisitions, compared to other possible uses of cash. But it is hard to see where else AT&T could have gotten free cash flow and revenue gains, immediately, from other investments such as more fiber-to-home or advanced LTE.

Sure, AT&T could divest DirecTV. It could use the proceeds to reduce debt. But where else can AT&T quickly boost revenue and free cash flow, were it to do so? I just do not see it.