FTTH is the Network of the Future; the Issue is How Far Off is "the Future?"

“Fiber is the future of networking, and always will be,” one wag from the cable TV industry said several decades ago, as the hybrid fiber coax architecture began to be installed. What he meant was essentially that what is good enough for present business purposes often is better than some other “perfect” alternative. 

The point is that business models matter. A networking platform that delivers market-leading bandwidth now, at lower cost than the other options--even the “perfect” long-term alternatives, arguably is a better choice in a competitive market. 

That does not mean the future perfect alternative will never make sense, only that alternatives offering sufficient bandwidth for the present, and near future, with higher profit margins, are a reasonable choice, especially if the platform is extensible. 

In other words, a platform with a roadmap to 10 gigabit per second speeds (hybrid fiber coax or 5G) might often be a reasonable networking choice now and for the near future, even if not perfect. 

That in no way means optical fiber to the customer premises is not “the future,” at least for many locations where fixed networks are feasible. We might all agree that, eventually, it is. 

Between now and then, though, service providers must operate businesses that face constrained revenue upside, putting a premium on platforms that can deliver market-standard bandwidth now, at lower cost than a full and complete upgrade to fiber to the home, if that is feasible. 

In a strategic sense, one might agree that “the debate over the best infrastructure to deliver fixed last-mile broadband service in the 21st century is settled, and fiber is the undisputed winner,” without agreeing that this is the best networking choice today, not later in the century, for all suppliers of internet access. 

To use an obvious example, 5G fixed wireless--not optical fiber--is a feasible way for some mobile operators to take market share in the fixed networks internet access market, at far lower cost than would otherwise be feasible for them. In an era where access revenue potential is sharply limited, and might actually be falling, lower platform costs matter. 

Likewise, cable TV operators, who have perhaps 66 percent share of U.S. consumer fixed network internet access market share, are far from the point where it makes sense, as a general rule, to replace HFC with FTTH. 

In other words, one can agree that “fiber is the superior medium for carrying fixed broadband by almost every metric: available bandwidth, SNR, theoretical capacity, real-world throughput, latency, and jitter,” without agreeing that it is the “best” platform for all contestants in competitive markets, where stranded assets stranded assets represent more than 50 percent of all consumer locations, and possibly no more than 33 percent. 

Though optical fiber to the premises networks are “the best” in a technological sense, they might not be best in terms of business model. That is especially true in competitive fixed network markets, where multiple facilities compete and financial return hinges, in part, on the percentage of revenue-generating accounts any network can hope to attract.

5G Fixed Wireless Adoption Depends in Part on Pricing Strategy

Consumers in the United States and United Kingdom might have significant appetite for fixed wireless internet access, according to a survey conducted on behalf of CCS Insight. 

Respondents listed price, performance and quick installation as the leading factors that might encourage them to sign up to 5G home broadband.

source: CCS Insight

We should be cautious about 5G fixed wireless forecasts in part because so many early estimates seem to include both infrastructure products to enable 5G fixed wireless as well as service subscriptions. That noted, it is possible that fixed wireless service revenues might approach 10 percent of total 5G service revenues, by perhaps 2029. 

source: IDTechex

Other forecasts suggest there could be about 13 million 5G fixed wireless accounts in service by about 2024. 

DIY SD-WAN?

“Do it yourself” has been a viable sourcing strategy for many types of enterprise services that might otherwise be provided by a connectivity service provider, including private wide area networks and business voice. 

In addition, there are services such as software-defined wide area networks (SD-WAN) that are enterprise created and operated, or are put together by managed service providers who create private networks incorporating some basic forms of service provider products.

That noted, many believe connectivity provider solutions will continue to build market share. 

source: Juniper

In addition to the DIY approach that was an early feature of SD-WAN networks, a growing number of managed service providers are competing directly with connectivity provider SD-WAN offerings. 

“There is a growing emphasis on managed SD-WAN rather than DIY deployments in both North America and across Europe, the Middle East and Africa (EMEA) and Asia,” according to researchers at Analysys Mason. 

source: Cisco

That trend might be even stronger for offers made by MSPs with roots in other parts of the value chain. Citrix and CloudGenix, for example, tout the integration with apps provided by Ring Central, Salesforce and hyperscale data center suppliers, for example. In other cases it is the security function that is the solution purchased, with SD-WAN being part of that solution. 

In many such cases, the SD-WAN functionality is part of a wider offer based on applications and their performance. Equinix sells SD-WAN services built on Citrix, for example. 

Several SD-WAN vendors, including Aryaka and Cato Networks, operate private backbone networks, with a “cloud-native” marketing platform. 

Opportunities in the SD-WAN Market

Should Telcos Stop Trying to Move Up the Stack, Across the Ecosystem?

Virtually all equity analysts subscribe to a particular view of how tier-one telcos should run their businesses. Basically, they should stick to their connectivity knitting and not attempt to diversify into other areas of the application, computing, content, financial services areas.

In that view, even if the telecom industry has low revenue growth, it should be able to wring cash flow margins (30 percent to 40 percent), with modest capex except when going through episodic technology upgrades about every decade, with recurring revenue sustaining their business models, argues Cestrian Capital Research. 

Pre-tax free cash flow then could remain in the 20-percent range, and the ability to pay dividends in the five percent range. 

The issue is whether that is sustainable long term. 

And there are historical reasons for skepticism about moves into market adjacencies: telcos rarely have succeeded. In 1991, AT&T acquired computing firm NCR, then spun it back out in 1996 after discovering it could not create the expected synergies between computing and communications. In 1998 AT&T acquired Tele-Communications Inc., the largest U.S. cable TV operator, along with other assets intended to transform the legacy long distance voice provider into a broader business. AT&T, struggling with high debt, later sold the TCI assets to Comcast. 

British Telecom BT and Deutsche Telekom have gotten into the content business, as have AT&T and Verizon. Some will point to financial underperformance by many leading telcos that have diversified, and argue the diversification failed. 

Others might argue the issue is that the legacy revenue drivers simply are eroding faster than the new lines of business can be built. Traditionally, enterprise customers drove the bulk of profits for tier-one telcos. That has changed in the competitive era. Much the same trend can be seen even in the mobile data business that has over the past decade driven revenue growth in the mobile business, even as mobility has driven revenue growth for the global telecom business.  

source: Analysys Mason

“We believe that telcos should reduce reliance on communication revenues by extending their reach across the telecom value chain,” say analysts at DBS Group. Nokia Bell Labs also believes the value proposition must shift from connectivity, as well. 

Fundamentally, the telco problem is that prices for its core connectivity products are trending towards zero. And even with scale, near-zero prices will not sustain today’s business model.

Key Telecom Challenge: Prices Only Go Down

Nothing better summarizes the challenges faced by executives and firms in the connectivity business than the quote by Grant Kirkwood, Founder and CTO of Unitas Global, at the PTC Academy Bangkok: Executive Insight for Exceptional Leaders course in Thailand, 23-25 September 2019.

“My advice is do not operate a network,” Kirkwood quipped, referring to a key problem noted by many instructors, that prices and average revenue in the business “only go down, they never go up.”

Margin erosion, product maturity or decline, and competitive threats and opportunities were recurring themes across the program.

Sponsored by CAT Telecom and in collaboration with APTelecom, the course hosted students from Thailand, Brunei Darussalam, Malaysia, Hong Kong, and India.

Nine instructors from six countries came together for a jam-packed educational event featuring content including undersea innovations, 5G, the transition to next-generation technologies, OTT, digital advertising business models, tools for professional development and networking, corporate social responsibility, and capacity procurement.

A tutorial on interconnection dos and don’ts was provided by Eric Green of Cambridge Management Consulting, while Mark van der Maas of AppsFlyer talked about digital advertising issues. Sean Bergin of APTelecom led a team exercise on next-generation opportunities and problems, while Eric Handa, also of APTelecom, discussed social responsibility issues.

Russell Lundberg of Intelefy explained how to use LinkedIn for career advancement. Gary Kim addressed 5G and Ubonpan Chuenchom of CAT Telecom provided an overview of Thailand’s peering environment.

Thank you to CAT Telecom for providing a fantastic venue, audio-visual support, food and beverage, and warm hospitality.

5G Might Truly be Different

There is one way 5G might be quite different than all prior generations of mobile, and not for reasons directly related to network performance. All prior generations of mobile service had business models based on humans using phones. But 5G is the first mobile network where most of the actual subscriptions might be used by computers and sensors.

Ericsson points out that consumer-related service revenues will have an annual growth rate of 0.75 percent through to 2030. Providers of apps and services in other parts of the information and communications technology, on the other hand, will see compound annual growth rates (CAGR) of close to 12 percent over the same time frame. 

Ericsson believes connectivity service providers could address as much as 18 percent of total information and communication technology revenues, representing about $700 billion. 

By definition, those information and communication technology opportunities will come from enterprise customers, not consumers. And that could be the biggest strategic change caused by 5G. 

Unlike all prior mobile generations--might feature incremental revenue sources and growth mostly coming from enterprise services, not consumer mobility that has driven growth since the 2G era (the first generation of mobile arguably having been adopted mostly by businesses). 

As Syniverse sees matters, for example, “5G is not dependent on consumer subscription of services like the wireless generations before it.”

“With decreasing average revenues from consumers in developed markets, U.S. mobile operators (60 percent of survey respondents) are shifting the focus to enterprise use cases to make money on the evolution to 5G,” says Syniverse. 

Nearly 60 percent of poll respondents say that 5G will swing their company’s focus to enterprise ecosystems, while 77 percent of respondents believe services such as network slicing supplied by 5G core networks. 

Mobile industry executives believe most of the new revenues from 5G will come from enterprise services including network slicing. Some service providers expect revenue lift from enterprise customers of perhaps five percent to 10 percent within just a few years. 

In fact, "In the 5G era, telcos will earn 70 percent of their 70 percent of their net revenue from enterprises” says Sanjay Kaul, Cisco head of Asia Pacific and Japan service provider business.