How Much Share Does 5G Fixed Wireless Have to Shift to be Meaningful?

How much market share does 5G fixed wireless have to shift before it affects the profitability of the fixed network consumer internet access market? Not much. 

In recent quarters, for example, U.S. fixed network internet access net additions have totaled about six tenths of one percent of the installed base, with cable gaining eight tenths of one percent while telcos lost about two tenths of one percent. 

In other words, a shift of about two-tenths of one percent per quarter halts the telco decline. A shift of perhaps six-tenths of one percent--from cable to telco--actually causes cable share to begin a decline. 

That is what the stakes realistically are: a chance for telcos to halt, and perhaps reverse, the long-term decline of their market share in internet access. 

Cable TV executives in the U.S. market naturally express as much skepticism about the dangers 5G fixed wireless services pose for their consumer broadband business as telco execs say they are optimistic. Basically, it will no scale, or will scale too slowly to keep up with cable’s own planned bandwidth plans, cable execs tend to say. 

There is reason for the cable views. The threat of optical fiber to the home has existed for a few decades, but has not dented cable’s emergence as the leading supplier of consumer internet access connections using fixed networks. Cable has about 67 percent of the installed base and has essentially gotten more than 100 percent of the net new account additions for a couple decades. 

In fact, over the last 20 years, it would be hard to find a single year where cable broadband net account gains were not about 60 percent to 70 percent of all net gains. 

source: NTIA 

source: Broadband Trends 

source: Leichtman Research Group

But the impact of 5G fixed wireless is not that it dramatically upsets the market. 5G fixed wireless might be the only way telcos collectively can halt a long-term decline of their market share. 

It might be prudent not to envision any scenario where 5G fixed wireless actually upends the market share structure. Instead, 5G fixed wireless probably is relevant because it might shift just enough share to choke off the cable growth model, reverse the telco share loss trend, and then change profit margins.

It is very subtle stuff. Verizon, for example, only has to gain about 7,000 5G fixed wireless accounts per quarter to halt its customer losses. T-Mobile US and Sprint have virtually zero fixed network market share, so even smallish gains represent new accounts with average revenue possibly double what they get from mobile internet access accounts.

Why 5G, Why Now?

There is a very simple reason why 5G networks must be built, and the numbers from the U.S. market illustrate the concept nicely. By design, 5G will increase capacity and speed a minimum of 10 times. That has been the case for every mobile platform since 2G. 

Since observers expect a 10-fold increase in mobile data consumption over the next decade (perhaps even sooner), 5G simply represents a way to supply customer demand for mobile data. Everything else--new use cases to drive revenue--is a bonus. 

The same argument explains why 5G is needed: cost per bit really has to fall at least 10 times over the next decade.

The issue is how high mobile data consumption might go. Ericsson believes it is possible U.S. mobile customers could be consuming 39 GB each, per month, by about 2024. In a “typical” household of 2.5 people, that implies potential “household” mobile data consumption of nearly 98 GB per month. 

source: Ericsson

Here is one way of looking at the required increases in mobile capability. By the end of 2018 average (“mean,” I believe) U.S. household data consumption on fixed networks was 268.7 gigabytes (I believe the figure is “per month”), according to Openvault, up about 19 percent from mid-year and up 33 percent from 2017 levels. So it seems likely that consumption will have grown at least 33 percent in 2019, and most likely higher. 

So one "high end" scenario is that mobile networks theoretically might have to carry the same amount of data as delivered by a fixed network, where 5G fixed wireless competes for home broadband accounts directly with fixed networks.

The "typical" expectation might be that mobile networks must satisfy mobile data demand for about 2.5 users per household (about the U.S. average household size).

Assume an average of 2.5 persons per household, each using the average amount of data. That suggests a mobile data consumption per household around 27 GB per month. But spreading use of “unlimited usage” plans likely will push consumption higher. 

Customers on unlimited plans consume 67 percent more mobile data than consumers on usage-based plans in 2017, according to NPD.

Average monthly mobile data usage is around nine gigabytes per month. In a “typical” U.S. household of perhaps 2.5 people, that works out to about 27 GB per month of mobile data consumption, “per household,” on the mobile networks. 

Others believe consumption is lower, at perhaps six gigabytes per user, per month, according to Strategy Analytics.

The implication is that mobile networks will have to be designed to carry between a quarter and a third of the data now expected in a typical U.S. household. That is a big jump from present levels. If the typical mobile user consumes 9 GB, and a household 268 GB, then mobile traffic is about three percent of fixed network levels.

That, in turn, implies an increase of mobile data capability by about an order of magnitude by 2024.

Hence 5G, which will increase capacity by a minimum of 10 times over 4G networks.

Telefónica to Shed Most Latin America Assets

Telefónica is unwinding a significant portion of tis “grow by acquisition” portfolio in an effort to reignite growth. Among the key moves, Telefónica will:

1. Prioritize Spain, Brazil, the UK and Germany
2. Spin off most of its Latin American assets
3. Launch Telefónica Tech, supplying  enterprise customers with cybersecurity, IoT, big data, and cloud services
4. Create Telefónica Infra, intending to be a supplier to other service providers.

José María Álvarez-Pallete, Telefónica chairman and CEO, talks about the changes.  

Sometimes Rankings do Not Matter Much

Sometimes international rankings on various measures of connectivity quality are less important than you might think. Consider voice adoption, where the best the United States ever ranked was about 15th globally, for teledensity (people provided with phone service).

Does anybody really think that was any kind of impediment to economic growth? That might also be the case for video entertainment quality of experience.

To the extent that video quality of experience is becoming a criteria for mobile service, operator policies, usage and bandwidth supply have a big impact. In fact, bandwidth alone does not dictate video quality of experience, Opensignal suggests, as some countries with good downstream bandwidth lag on video experience scores.

You might think that sheer download speed mostly or exclusively is key to experience rankings, but Opensignal tests suggest this is not the case. 

South Korean users’ experience ranked first for download speed yet 21st for video, while Canadians’ were third fastest for download speed, but just 22nd for video. 

Those results happen because mobile operators manage video traffic to preserve experience for other apps as well. 

Experience also is a function of deliberate policy: carriers often automatically convert the picture quality of video from 1080p full HD, down to 720p, or even to just standard definition quality. Also, some service providers might offer standard quality or 720p image quality as a part of policies that offer unlimited or zero-rated video access. 

Also, customers on unlimited usage plans might not have the same incentives to switch to Wi-Fi connections as do other customers with more-limited data usage plans. 

The point is that a combination of circumstances--high video consumption, unlimited usage plans, limited spectrum and retail packaging--combine to reduce image quality scores. 

What is not so clear is the importance of image quality for consumers, compared to usage allowances and rating policies. In other words, customers might accept or prefer lesser image quality in exchange for ratings policies that save them money, in the same way they often will tolerate advertising if it saves them money. 

The value proposition is especially important if access to mobile video entertainment is a key part of the marketing. In the U.S. market, for example, T-Mobile U.S. includes Netflix on its Magenta plans; Sprint includes Hulu and/or Amazon Prime on a number of its plans; Verizon advertises 5G as suitable for 4K video quality on mobile and bundles Disney+ with its 5G wireless home broadband plans; and AT&T offers one of HBO, Starz, Cinemax, or Showtime as part of its Unlimited and More Premium plan. 

Mobile video importance can be seen in advertising as well. The Internet Advertising Bureau says 62 percent of total video ad starts are happening on mobile devices, for example. 

The Opensignal methodology takes picture quality, video loading time and stall rate into account to create a score on a scale of 0 to 100, reflecting users’ perceived mobile video quality. 

While there was an improvement in U.S. customer video experience, it remains in the “fair” category. U.S. customers had the lowest video experience score of any of the G7 countries as “U.S. carriers struggle with the combination of enormous mobile video consumption and insufficient new spectrum.”

U.S. mobile service providers face two key challenges not seen in many other countries: U.S. consumers watch a lot of mobile video, while spectrum is limited. 

Opensignal has found that 39 percent of U.S. consumers watch TV programs on their smartphones, and similarly, 38 percent watch movies. Also, 28 percent of consumers sometimes switch to mobile connections in order to watch video.

Some 38 percent of consumers watch video on their smartphone at home on a mobile connection (compared with 71 percent that watch at home on Wi-Fi).

International rankings can be useful. At other times they are interesting, but perhaps not indicative of pressing business problems.

Spectrum Policy is the Latest in a Long String of "U.S. is Falling Behind" Claims

Over the past few decades I have often heard observers expressing great worry about one or another divides or gaps that have U.S. service providers and consumers behind users and customers in other regions.

U.S. consumers were “behind” Europe and Japan in mobile phone use, text messaging, 3G use, internet access, broadband adoption and speeds, and always are “paying too much” for their services.

The U.S. is falling behind meme never goes away, where it comes to communications. The latest assertion is that the United States is falling behind in 5G. That claim has been made many times in the past, and always has proven wrong.

In the past, it has been argued that the United States was behind, or falling behind, for use of mobile phones, smartphones, text messaging, broadband coverage, fiber to home, broadband speed or broadband price.

It is an old pattern of claims. Consider voice adoption, where the best the United States ever ranked was about 15th globally, for teledensity (people provided with phone service). Does anybody think that was any kind of impediment to economic growth?

With the caveat that some rural and isolated locations never got fixed network phone service, not many would seriously argue that the supply or use of fixed network voice was an issue of any serious importance for the nation as a whole, though it is an issue for rural residents who cannot buy it.

Some even have argued the United States was falling behind in spectrum auctions.  What such observations often miss is a highly dynamic environment, where apparently lagging metrics quickly are closed.

The latest candidate is 5G spectrum policy. 

Over the past year there have been many shouts of alarm about the “choices” being made for 5G spectrum. Millimeter is the wrong spectrum, it has been said. Mid-band spectrum is the “right choice,” many have argued. 

Those criticisms are rather off point. Different countries are making different immediate choices largely because--of a range of permissible frequencies--mid-band is available. 

For historical reasons, the mid-band is not immediately available in the U.S. market, forcing early movers to rely on millimeter wave spectrum sooner than they might have preferred, even if the 5G standards clearly point to millimeter wave as the future of 5G, and subsequent platforms as well, simply because that is where most of the unencumbered spectrum exists. 

The U.S. Federal Communications Commission is not ignorant. It knows what resources can be made available now, and what has to happen to clear more mid-band spectrum. It is doing so. Clearing part of the C-band is among the actions the FCC is taking. But that takes time. 

Verizon, in particular, has had to rely on millimeter wave. Among the top four national carriers, it has the least spectrum, per customer. And after weighing its options for bandwidth, Verizon concluded that upgrading its terrestrial network with dense optical fiber, enabling small cells and hence millimeter wave radio networks, made more sense than bidding for lots of new spectrum. 

That does not mean Verizon or the other service providers will be shy about bidding on additional spectrum. “More” is always the answer, longer term. 

Still, Verizon believes the cost of its dense fiber network approach will work for capacity expansion. Verizon surely will rely on mid-band for coverage. AT&T initially relied on millimeter wave for its business-focused services, especially for fixed network substitution. 

Its consumer 5G will use 850 MHz low-band spectrum, and AT&T will acquire more mid-band spectrum when it is made available. 

T-Mobile, with relative plentiful new 600-MHz assets, will rely on low-band for its 5G launch. Sprint has lots of mid-band spectrum licenses, which will eventually be put to work by whatever company winds up owning it. 

The larger point is that no dangerous or wrong spectrum choices have been made by the FCC or service providers. Specific firms have made choices congruent with their assets and strategies. Long term, there is no “choice” to be made between millimeter wave and mid-band spectrum or low-band. All will be used.

But different service providers in different countries have differential access to low-band or mid-band spectrum. So the initial strategies and deployments will reflect those immediate realities. Longer term, all the choices will be in play. 

5G is How the Industry Copes with 300% Consumption Increase in 6 Years

If mobile data consumption globally grows by 300 percent, as Ericsson now predicts, the value of 5G is that it allows mobile operators to support that consumption growth. Compared to all other operating networks (2G, 3G and 4G), 5G is the network that will handle most of the growth, while also allowing mobile operators to supply that demand while preserving a profit margin.

source: Ericsson

"Pipes to Platforms" is a Generic Problem, Not Just a Telecom Issue

Telecom is not the only business or industry where debates about business strategy include the issue of “pipes versus platforms.” 

In fact, almost all businesses use a “pipe” model: they source and create products sold to customers. Firms create products, push them out through various distribution systems for sale to customers. Value is produced upstream and consumed downstream. 

Virtually all consumer goods use a pipe model, as does manufacturing, media, most software products and education. 

Platforms are different. Unlike pipes, platforms do not just create products and sell them. Platforms allow users to create and consume value as well. When external developers can extend platform functionality using application platform interfaces, that usually suggests a platform model could exist. 

Another way of stating matters is that, on a platform, users (producers) can create value on the platform for other users (consumers) to consume. Think of YouTube, Wikipedia, Amazon, Uber or Lyft. 

The business implications can be profound. Some attribute Apple’s rise to prominence in the phone industry not on its design, its user interface or operating system features but to its creation of an ecosystem and platform. 

In fact, the ability to generate revenue from acting as an intermediary or marketplace for different sets of market participants is the functional definition of whether some entity is a platform, or not. 

That can be glimpsed in service provider video subscription businesses, where revenue is earned directly from subscribers, but also from advertisers and in some cases from content suppliers. It is the sort of thing eBay must do, daily, in a more direct way. 

source: Platform Business Model 

To be sure, there are some differences between the traditional app provider platform and any possible connectivity provider platform. For starters, by definition, app platforms tend to be asset light. No surprise there. Software-based businesses almost always are less asset intensive than most other physical businesses. 

In general, however any “pipe” business that sells a set of products directly to its customers will tend to require more owned assets than a software business that operates in an ecosystem. 

source: Platform Business Model

At a high level, when executives and professionals in the connectivity business talk about dumb pipes, they almost always refer to commodity product business models selling undifferentiated carriage or delivery of bits. But there are other senses in which the “pipe” model also matters. 

If one believes that prices for telecom products are destined to keep declining, or that more for the same price is the trend, then there are a couple of logical ways to “solve” such problems. 

Connectivity providers can create and sell new or different network-based products or shift into other higher-value and different parts of the product ecosystem. That is one way to escape the trap of marginal cost pricing, which might be the industry’s existential problem. 

But it is not clear whether telcos can create platform business models, and if so, where and how. The traditional connectivity business seems destined to remain a pipe (create products sold direct to consumer) model. There are glimmerings, though.

Some service providers who now are video subscription providers can create an advertising venue or marketplace once the base of subscribers grows large enough. So that provides one example. 

Some data centers work on creating marketplaces or exchanges that enable transactions beyond cross connects, even if the revenue model is indirect (marketing potential, lower churn, higher tenancy, greater volume) 

So far, connectivity providers are mostly thinking about what could emerge with edge computing, beyond the pipe revenue model (selling compute cycles or storage). Some might envision a potential role in one or more internet of things use cases such as automobile IoT or unmanned aerial vehicle networks. 

Still, it never is easy for any company, in any industry to create a platform model, even if many would prefer it over a pipe model. 

But the potential path forward seems logical enough. The historic path to create a platform has often involved sale of some initial direct product, sold to one type of customer, before becoming the foundation for creation of the marketplace or platform that creates new value for different sets of customers. 

That strategy might be called stand-alone use, creating a new market by directly satisfying a customer need, before a different two-sided or multi-sided market can be created, where at least two distinct sets of participants must be brought together, at the same time, for the market to exist. Virtually any online marketplace is such a case. 

Others might call it single-player. OpenTable, which today has a marketplace revenue model, originally only provided a reservation system to restaurants, operating in a single-sided market mode, before it then could create a two-sided model where restaurants pay money for the booked reservations made by consumers. 

The first million people who bought VCRs bought them before there were any movies available to watch on them. That might strike you as curious, akin to buying a TV when there are no programs being broadcast. 

In fact, though commercialized about 1977, it was not firmly legally established that sales of VCRs were lawful until 1984, when the U.S. Supreme Court ruled that Sony could sell VCRs without violating copyright law, as Hollywood studios alleged. 

So what were those people doing with their VCRs? Taping shows to watch later. Time shifting, we now call it. Only later, after Blockbuster Video was founded in 1985, did video rentals become a mass market phenomenon. 

So here is the point: quite often, a new market is started one way, and then, after some scale is obtained, can develop into a different business model and use case. 

Once there were millions of VCR owners, and content owners lost their fear of cannibalizing their main revenue stream (movie theater tickets), it became worthwhile for Hollywood to start selling and renting movies to watch on them. 

Eventually watching rented movies became the dominant use of VCRs, and time shifting a relatively niche use. 

So OpenTable, which operates in a two-sided marketplace--connecting restaurants and diners--started out selling reservation systems to restaurants, before creating its new model of  acting as a marketplace for diners and restaurants.

The extent to which that also will be true for some internet of things platforms is unclear, but likely, even for single-sided parts of the ecosystem. 

The value of any IoT deployment will be high when there is a robust supply of sensors, apps, devices and platforms. But without many customers, the supply of those things will be slow to grow, even in the simpler single-player markets. Just as likely, though, is the transformation of at least some of the single-player revenue models to two-sided marketplaces. 

In other words, a chicken-and-egg problem will be solved by launching one way, then transitioning to another, more complicated two-sided model requiring scale and mutual value for at least two different sets of participants. In a broad sense, think of any two-sided market as one that earns revenue by creating value for multiple sets of participants.

Amazon makes money from product sellers and buyers, while at the same time also earning revenue from advertisers and cloud computing customers. 

Telcos have faced this problem before. 

Back in the 1870s and 1880s, when the first telephone networks were created, suppliers faced a severe sales problem. The value of the network depended on how many other people a customer could call, but that number of people was quite small. The communications service has a network effect: it becomes more valuable as the number of users grows. 

These days, that is generally no longer the case. The number of people, accounts and devices connected on the networks is so large that the introduction of a new network platform does not actually face a network issue. The same people, devices and accounts that were connected on the older platform retain connectivity while the new platform is built. 

There are temporary supply issues as the physical facilities are built and activated, but no real chicken and egg problem. 

It remains to be seen whether some connectivity providers also will be able to create multi-sided (platform) markets for  internet of things or other new industries. 

The initial value might simply be edge data center functions. Later, other opportunities could arise around the use of edge computing, the access networks, customer bases and app providers. It would not be easy; it rarely is. But creating new revenue streams for some customers who just want edge computing cycles could create foundation for other revenue streams as well.