5G Really is Not the Issue

Much of the upside from “5G” actually is from edge computing or internet of things or artificial intelligence. The term “5G” as popularly understood often is not about 5G as such, but the value to be produced by several related technology trends, all working together. 

"5G itself isn’t a magic bullet; it’s a misunderstanding to assume 5G will immediately make everything fast," says Jake Moskowitz, head of the Ericsson Emodo Institute. "If I get a 5G phone right now, even if I live in a 5G network, I’m unlikely to notice much of a change.”

“That’s because 5G is really an enabling technology, and for 5G to have a big impact, it requires multiple 'complementary technologies to come along with it, and those are not in place yet," he adds.

Bernie Ebbers Dies. For the Last 50 Years, Much of the Telecom Industry Also Died

Bernie Ebbers, WorldCom founder, has died. In some ways, WorldCom was emblematic of a frenzy of super-heated growth efforts in many parts of the telecom business around the turn of the century. 

The year 2000 also was notable as it represented the absolute peak of the traditional voice business in the U.S. market. After 2000, every part of the U.S. voice business began a long, steady revenue and subscriber decline. 

Though the company was marred by a major accounting scandal that sent him to prison,  Ebbers began building WorldCom by selling long distance voice services in 1983. Through a string of acquisitions, WorldCom even purchased the former MCI in 1998. In 2000 Worldcom tried to buy Sprint as well, though that deal was scuttled by regulators.

For some of us, the $35 billion acquisition of MCI was a landmark, as MCI is the firm that first brought competition to the U.S. communications services market, challenging then-monopolist AT&T with a private line running between St. Louis and Chicago in 1969. 

Think about it: until 1972, AT&T did not even have a marketing department. What would have been the point for a monopoly communications supplier whose profits were a guaranteed rate of return on its investments? 

Until 1968 AT&T was the sole supplier of U.S. telephones, transmission cables, switches, software and services for most of the United States. No other firms were allowed to attach devices to the AT&T network until after 1968. 

But the 1969 Carterphone Carterphone decision allowed use of third-party acoustic modems on the AT&T network. 

MCI also launched legal efforts that most would agree lead to the 1982 Modified Final Judgment that ended the AT&T monopoly, and the 1984 birth of legally separate Bell Operating Companies and AT&T, launching the era of competitive telecommunications in the United States and elsewhere. 

As with the later Telecommunications Act of 1996, is the first major overhaul of telecommunications law in almost 62 years, competition was the key objection. But something funny happened. Everyone thought the point was introducing competition into the voice business. 

By about 2000, the whole voice business began declining, with the internet emerging as the key feature of the next era of telecommunications and applications. Since 1968, the whole presumed point of competition was lower prices for long distance calling, local telephone service and third party supply of phones. 

In his 1986 book The Deal of the Century, author Steve Coll predicted that “AT&T will find itself along in the basic long distance market by the end of the century.” 

In truth, none of the former giants of the long distance business survived. 

By 2005, AT&T had been acquired by SBC Corp., one of the former Baby Bells. MCI was acquired in 1998. And Sprint, whose long distance business became a revenue footnote, was acquired by Softbank in 2012, primarily for its mobile business. 

The big takeaway from decades of telecom deregulation is simply to note that nearly every major telecommunications regulatory effort since 1968 (about fifty years) aimed in some way to introduce more competition into the voice business. 

Along the way, the business itself shattered. There is at present almost no upside to further efforts to “deregulate voice,” which has ceased to drive industry revenue or consumer demand. Voice is an essential function, but not the key revenue driver. 

Equally crucially, the universal use of internet protocol means we have formally divorced application ownership from network ownership. All telecom networks now are essentially “open.” Any lawful app provider is free to use the networks. 

So while innovation is virtually limitless, network access profitability now is a new issue. Telecom operators used to develop, own and profit from every app on the network. These days, connectivity suppliers profit only from a few owned apps, and they are never the sole suppliers. 

It is not clear what the next 50 years will bring. But the general movement has been towards products, services, revenues and profits shifting to third party users of connectivity networks. 

Along the way, some connectivity providers also have shifted their own revenues in that direction. Over time, it is possible that much of the “connectivity function” is subsumed into “functions that support our business model,” which might be advertising, e-commerce, marketing or some other activity. 

So advertising-driven Google operates its own data centers, subsea networks, fiber to home networks, Wi-Fi networks and mobile networks, and builds its own computing, mobility and content acquisition devices. 

Google develops or experiments with novel internet access platforms using balloons, satellites or unmanned aerial vehicles and creates its own content services. 

Amazon’s e-commerce model requires it to operate its own data centers, subsea networks, a private content delivery network, video and audio services, devices and apps. 

Facebook runs its own data centers, subsea networks and satellite networks to support its advertising business. 

It is hard to see those trends abating. Nor does it seem unreasonable to expect continued pressure on the connectivity provider business model, as revenue growth is slowed by competition and customer saturation. 

Worldcom and MCI were part of a huge change in the telecom business few expected. Functions might remain, but huge entities might continue to find themselves challenged to survive in the old ways.

U.S. Internet Access Actually is Not Slow or Expensive

About 91 percent to 92 percent of U.S. residents have access to fixed network internet access at speeds of at least 100 Mbps, according to Broadband Now. 

source: Broadband Now

Some 61 percent of U.S. residents have access on stand-alone plans at $60 a month or less. It is more difficult to tell what prices most consumers pay as so many customers buy service bundles where the cost of internet access is lower than the stand-alone price. 

According to one estimate, 51 percent of customers with internet access between 100 Mbps and 249 Mbps were on discount plans. Of customers with service faster than 250 Mbps, 65 percent of accounts were on discounted rates. Basic rate accounts offering 55 Mbps to 99 Mbps also were on discounted plans about 54 percent of the time. 

source: Wall Street Journal

Some estimate the typical price is about $60 a month. That matches Comcast’s reported cash flow per unit of $63. 

source: Broadband Now

Many will complain that these prices are “too high,” but U.S. internet access prices are part of total telecommunications spending of less than two percent of gross domestic product, less than in Japan and South Korea but more than in Europe. 

source: ETNO

The Whole Point of Deregulation is to Cause Incumbents to Lose Market Share

The global telecommunications industry was for a hundred years a slow-moving utility business that changed very little from year to year. The change from monopoly to competition, starting in the mid 1980s, increased the tempo of change, but the industry still is recognizable from what it was 35 years ago, though its products have changed. 

On the other hand, the whole point of deregulation is to shift market share from incumbents to challengers, and that has happened, virtually everywhere. In many markets, and for some products, incumbents no longer are the market share leaders. 

Think of how much the WAN connectivity business has changed. Three decades ago, wide area networks were built and operated by telecom companies. Today, the primary suppliers are third parties--often big end users--and new entrants, not legacy telcos. 

Traffic demand also now is shaped by app providers and their data centers. 

The drivers of global WAN capacity now are video content and internet applications supported by hyperscale data centers owned by major app providers. Those enterprises also build, own and operate their own global WAN networks, paid for by revenues from their app, content and device businesses. 

source: TeleGeography

source: TeleGeography

The function of the WAN remains, but it is an internal cost of doing business for some major app, commerce or content providers. Just as important, such private WANs no longer represent as much of a WAN services revenue stream. 

source: Cisco

One way of looking at traffic flows is that traffic will flow between the hyperscale data centers operated by a relatively few firms, as well as between those data centers and users of apps hosted at those locations. 

source: Vox.com

What Will Telecom Look Like in 20 years?

Few, if any, executives or managers ever really looks out two decades to shape today’s business decisions. It simply is not rational to do so. Futurists, otten wrong as much as 80 percent of the time, must do so. 

“The insurance, transportation, and retail industries will either not exist in 20 years or will have changed completely due to artificial intelligence, innovation, and other factors,” according to Dave Jordan, global head, consulting and services integration at Tata Consultancy Services.

With the caveat that the odds of being substantially correct are perhaps lower than 20 percent, what might today’s communications business look like in 20 more years? 

The TCS analysis works something like this: auto insurance will not be needed as much when autonomous vehicles reduce so many accidents, when not so many people own their own personal vehicles, and when 3D printing allows quick and cheaper repairs to vehicles. 

3D printing will enable so much personalization and customization that “mass market retailing” is unnecessary, TCS suggests. 

Applying the same sort of logic to the telecommunications industry, at least directionally, is not so hard. As the functions of software, firmware or communications often are embedded into the use of product, so larger parts of the “connectivity function” are likely to be subsumed into other products.

As tires are part of the value of a new car, and transmission was embedded in the consumption of over the air TV, so a growing part of the value of tomorrow’s products might include embedded communications, and be purchased as part of some other product.

As the cost of public Wi-Fi (and the cost of the WAN that connects it) is embedded in the cost of goods sold by retailers, as the value of hotel room Wi-Fi (and the cost of the WAN access), so the cost of connectivity might increasingly be bundled with the cost of other products (safety, transportation, content, devices). 

source: A.T. Kearney

AT&T, Comcast and Verizon Collectively Generate about $212 Per Home Passed, Annually

It is not easy to run a big fixed network business these days. As Verizon CEO Hans Vestberg said on Verizon’s fourth quarter earnings call, Verizon faces a “secular decline in wireline business that is continuing.” 

Secular means a trend that is not seasonal, not cyclical, not short term in nature. For multi-product companies such as AT&T, Verizon and Comcast, it can be argued that "everything other than the core business is doing a lot worse than the core business, both at Comcast and at AT&T and at Verizon.

One supposes the “core business” for AT&T and Verizon is mobility, while the core business for Comcast is fixed network broadband. The conclusion analyst Craig Moffett of MoffettNathanson reaches is that AT&T, for example, will have to be broken up. 

The suggestion to focus on the “core business” often produces financial returns when conglomerates are broken up. 

What might not be so clear is how breaking up triple play assets, or separating mobile from fixed assets necessarily helps the surviving connectivity assets to generate greater revenue and profits. 

Is it logical to assume that the AT&T and Verizon businesses would all do better if the fixed network assets, mobile assets and media assets were separated? Would Comcast’s financial returns be better if the content assets were separated from the fixed network, or the video entertainment business separated from the network connectivity business?

Given the “secular decline” of the fixed network business, could a fixed services only approach (internet access, voice and perhaps video entertainment) actually work, at the scale the separated Comcast, AT&T or Verizon assets would represent?

The issue is not whether a small firm, with a light cost structure, might be able to sustain itself in some markets selling internet access alone, or internet plus voice. The issue is whether an independent AT&T fixed network or an independent Verizon fixed network business could sustain itself. 

The answers arguably are tougher than they were twenty years ago, when a telco and a cable company faced each other with a suite of services including internet access, voice and entertainment video. Basically, they traded market, at best. Telcos ceded voice share, but cable lost some video share, and both competed for internet access accounts. 

At a high level, the strategy was that both firms would trade share, but by selling three services on one network, instead of one service on each network, the numbers would still be workable.

But the math gets harder when every one of those three services faces sustained declining demand and falling prices. 

That being the case, it is hard to see how a sustainable business can be built on connectivity services alone, especially for either AT&T or Verizon. Perhaps Comcast could survive with a strong position in internet access and smaller contributions from voice and possibly video entertainment. 

In the fourth quarter of 2019, Comcast Cable generated $14.8 billion in revenue.  Total revenue that quarter was $28.4 billion. 

Verizon’s fixed network business, on the other hand, generated about $7 billion, out of total revenue of nearly $35 billion. 

AT&T had fourth quarter 2019 total revenue of nearly $47 billion. AT&T’s fixed network, plus satellite TV, generated about $18 billion in revenue.  AT&T’s “fixed network plus satellite” operations generate 38 percent of revenue. Perhaps $8 billion or so of that revenue comes from the satellite operations. So the fixed network business might generate $10 billion in revenue. 

Comcast Cable passes 58 million consumer and business locations. Comcast has 26.4 million residential high-speed internet customers, 20.3 million residential video customers and 9.9 million voice accounts, generating average cash flow (EBITDA) of $63 per unit. 

At a high level, the problem is that Verizon’s entire fixed network operation generates about 20 percent of total revenue. AT&T’s fixed network generates perhaps 21 percent of revenue. Comcast, which has a small mobile operation, generates close to $15 billion from the fixed network. 

And that, it seems to me, illustrates the problem. Comcast, AT&T and Verizon all put together generate about $32 billion in fixed network revenue, and revenue is likely to remain flat to negative. 

Verizon homes passed might number 27 million. Comcast has (can actually sell service to ) about 57 million homes passed.

AT&T’s fixed network represents perhaps 62 million U.S. homes passed. 

CenturyLink never reports its homes passed figures, but likely has 20-million or so consumer locations it can market services to. 

Looking only at Comcast, AT&T and Verizon, $32 billion in annual fixed network revenue is generated by networks passing about 146 million U.S. homes. That works out to about $212 per home passed, per year. 

How that is sustainable is a clear challenge.

Analysys Mason 2020 Predictions