Where are 5G Partnerships Possible?

A new report produced by the Massachusetts Institute of Technology Technology Review and sponsored by Ericsson argues that connectivity providers do not possess the vertical market domain knowledge to create new services for autonomous vehicle fleets, internet of things and management of fully-automated factories.

That obviously is true, but does illustrate one important fact: connectivity providers now exist in an internet ecosystem where the expected and normal course of development is for third parties to create the apps that require connectivity. 

Consider the way Verizon sees 5G currencies. All relate to the network and its performance. In a closed environment, that might confer lots of advantage. In an open internet ecosystem, not so much, as app providers can use the network without any formal business arrangement. That limits the value the connectivity provider can extract from any service, application or company that requires the network to supply value. 

source: Verizon

“There is a growing understanding that operators cannot do it alone, and that an innovative ecosystem of partners will be crucial to future success, the report argues. To be sure, it is doubtful telco executives ever believed, over the last few decades, that they actually could create compelling consumer or business applications on their own, beyond voice and messaging. 

 “Executives interviewed for this report state that getting the full value of 5G is not something they can do on their own,” the authors say. That sounds simple enough, but has proven to be nettlesome. 

When the basic architecture of the network is that app providers do not need telco permission to operate and make their services available, it never is so clear what value a partnership with a telco actually provides. Generally speaking, the closer a third party is to the core “connectivity” function, the greater the value of the connectivity partner. Consider Alphabet’s Loon, the high altitude balloon-based internet access platform. 

Loon arguably is an infrastructure supplier for mobile operators, allowing them to use “cell phones in the stratosphere” to provide the same sorts of connectivity terrestrial cell towers provide. The partnership is that Loon’s customers include mobile operators, Loon acting essentially as an independent cell tower company, providing facilities to mobile operators. Mobile operators, in turn, are anchor customers for Loon. 

In other cases, as for edge computing, connectivity providers provide real estate services to edge computing firms, renting rack space, supplying energy, cooling, security and connectivity. 

The point is that partnerships between app and service providers and connectivity providers will require some thought. Opportunities will be greatest when the connectivity provider is a situationally key customer or a key supplier.  Very few firms are direct users of  cell towers on the ground or in the sky, and direct customers. Mobile operators are such key customers for Loon. 

Relatively few firms require edge computing real estate in a direct sense. Connectivity providers supply such real estate to cloud computing giants. 

But you see the pattern: such partnerships make sense for infrastructure. Apps and services beyond connectivity are not so obvious. 

How Big is Unified Communications as a Service Business?

It always is difficult to say with certainty how big a market unified communications represents. It is a mix of enterprise hardware and software (room videoconferencing systems, phone systems, for example) plus software and managed services (unified communications as a service), access services (SIP, for example), consulting and maintenance contracts. By some estimates, the global market in 2020 is about $12 billion. 

source: GM Insights

Others believe the the unified communications as a service (UCaaS) market alone represented about $16 billion in annual revenues in 2019. 

source: Markets and Markets

By other estimates, is $39 billion or $40 billion in annual revenues, or as much as $56 billion. Such forecasts rely on high rates of growth. 

Gartner estimated North America UCaaS spending having growth rates of 20 percent in 2019, for example, representing sales of about $2.1 billion. 

source: Gartner

Such figures explain why unified communications, either premises-based or delivered as a managed service, has been the province of specialists (integrators, interconnect companies, VoIP specialists, PBX suppliers). The market is too small to be of major interest to a tier-one service provider. 

At least in the U.S. market, any opportunity representing less than $1 billion in sales for any single firm is too small to chase.

Telcos and OTT Streaming Partnerships?

Amnesia? Not Really

Sometimes it seems as though we suffer from historical amnesia. We cannot seem to recall the lessons of something we have lived through before. Actually, that might not be the case. As data from Silicon Valley Bank shows, “we” have not actually lived through something before. 

Its latest market report shows that 61 percent of active venture capital firms have never experienced a recession. Just 23 percent of firms have weathered two recessions (the internet bubble and the Great Recession of 2008). About 16 percent experienced the Great Recession only.

In other words, it often is literally the case that industry participants actually have no memory of something because they were not in business at the time or were not in a position to make decisions at the time. 

So it is not actually true that active industry participants today actually have seen or lived through some events that are part of historical memory for others. It is not historical amnesia: it is youth. 

source: Silicon Valley Bank

Where are All the Unserved U.S. Households?

Since the “digital divide” is closing everywhere in the world, it simply stands to reason that the divide ought to be narrowing in the United States as well. That is not to say the divide closes completely, only that clear and steady progress is being made to supply better internet access to citizens who wish to buy it. 

The Federal Communications Commission says “the number of Americans lacking access to fixed terrestrial broadband service at 25/3 Mbps continues to decline, going down by more than 14 percent in 2018 and more than 30 percent between 2016 and 2018.” 

The FCC also notes that the number of Americans without access to 4G Long Term Evolution (LTE) mobile broadband with a median speed of 10/3 Mbps fell approximately 54 percent between 2017 and 2018.

Also, more than 85 percent of U.S. residents now have access (can buy) fixed terrestrial broadband service at 250/25 Mbps, a 47 percent increase since 2017. Over the same period, the number of Americans living in rural areas with access to such service increased by 85 percent, the FCC says. 

 Inevitably, some will lament the existence of differences; decrying a lack of perfection or simply arguing that the numbers are incorrect, arguing that the number of people without broadband access is 42 million or even as high as 162 million. 

It is not clear where those higher figures come from. Looking at connected households is revealing, however. 

The Federal Reserve estimates there are about 140 million housing units., defined as “a house, an apartment, a group of rooms, or a single room occupied or intended for occupancy as separate living quarters.” 

To be more precise, we also would have to account for households that either choose not to buy, or cannot easily buy. Some of those latter cases might be boats that serve as a residence, trailers or rooms rented inside homes where the resident does not buy internet access because the owner or manager of the property supplies the access. 

More than 16 million units are vacant at any particular time, leaving a total of perhaps 124 million units, which accords well with the estimate of 121.6 million households we get if we assume the U.S. population is 304 million persons, with an average household size of 2.5. Then there are 121.6 million households. 

That is the base of total locations fixed networks must reach. But a significant number of households choose not to buy fixed network access. 

Somewhere between 15 percent and 20 percent of U.S. homes are “mobile-only” for internet access, which might represent as much between 18 million and 24 million households. Those customers choose not to buy fixed network internet access, for whatever reason they choose. 

If so, then the number of locations who might buy fixed network internet access is on the order of 97.6 million to 103.6 million sites. 

If take rates for all homes (including the vacant units) are about 80 percent, then we would expect total fixed network accounts to number about 97.3 million locations.

Leichtman Research Group estimates that the largest U.S. telcos and cable companies have about 101.2 million accounts, but that includes business accounts. That matches fairly well the estimate that total fixed network accounts should be about 97.3 million in number. 

The point is that there are very few U.S. locations that do not already buy some form of internet access--mobile or fixed or both. That is difficult to square with claims that huge numbers of peop;le literally cannot buy service at 25 Mbps. 

Consider also that internet access routinely is available from satellite and other wireless and mobile platforms. 

Satellite broadband and fixed wireless operators traditionally have targeted rural homes and small businesses as their primary market, in the past said to include as many as 35 million locations. But estimates vary widely. Some say 80 million people live in rural areas, others say 46 million do, using the U.S. Census Bureau methodology. 

 Satellite broadband providers seem to have three million subscriptions, though some estimates (wrong, in my opinion) suggest that  6.76 percent of U.S. internet subscriptions are provided by satellite. 

Assume there are 139 million U.S. housing units, the high estimate, without adjusting for vacant units or other locations that cannot be wired. That implies nine million U.S. satellite broadband subscribers. No estimate I have seen--ever--suggests there really are nine million U.S. satellite broadband accounts. 

HughesNet believes 18 million homes are its market opportunity. Rental units alone might represent 6.6 million units, although not locations, as some of those units are in multi-family complexes. 

According to Urban.org, 13 million homes are owned by rural residents. Those figures roughly accord with HughesNet estimates of market opportunity. 

A more conservative estimate is that perhaps two percent to three percent of U.S. homes are the primary target for satellite broadband. That would include the most-isolated areas, where there are no terrestrial fixed networks using cabling. In many rural areas that are slightly more dense, wireless ISPs already operate. And, of course, there are many parts of rural areas served by cable operators or telcos. 

The point is that many homes already can buy 25 Mbps service, albeit from a satellite provider. 

A big issue is the presence of fixed wireless ISPs. According to Broadband Now, some 148.4 million U.S. residents are covered by fixed wireless ISPs. Assume an average household size of 2.5. That implies some 59 million rural locations already are reached by fixed wireless ISPs. 

Add all that up and some of us cannot fathom how 42 million to 162 million people actually are not able to buy 25 Mbps internet access.

Cable Competition Limits FTTH Market Share

According to IDATE and the Fiber to the Home Council Europe, U.K. coverage of fiber to home or building is about 15 percent of locations. Take rates--customers who actually buy service on those connections, is about 18 percent. In other words, it appears that less than one in five locations able to buy a fiber access service actually do so. 

source: IDATE

In France, about 57 percent of locations can buy. About 45 percent do so, IDATE data suggests. Though the percentages change, the same pattern holds elsewhere: offered the ability to buy fiber access service, only about 40 percent of potential customers do so. 

That might seem odd, but competition from cable TV operators helps explain the numbers. Across Europe, at the end of 2017, at least 36 percent of European homes could buy cable TV service, and a substantial number of those likely could buy internet access service from the cable operator as well. In 2017, for example, there were more than 37 million cable TV-supplied internet access accounts in service. 

Many Markets for Enterprise Products are Relatively Small

For all the attention SD-WAN gets in the network element and managed services business, it remains an almost-perilously small contributor to service provider revenues. That is not unusual. Many enterprise products, including unified communications as a service, actually product smallish revenues for service providers. 

Granted, the SD-WAN market features high growth rates. But total revenue remained extremely small as recently as 2018, when managed service revenue was only about $282 million, according to Vertical Systems Group.  

source: Vertical Systems Group

Gartner believes managed SD-WAN services reached possibly $2.5 billion in 2020. The total SD-WAN market is a mix of managed services and network element sales, though. The issue is the balance of sales, going forward. Some predict that managed services eventually will dominate revenue. 

source: Gartner

One way of estimating eventual managed service revenue is to view SD-WAN as the  replacement for MPLS, which might have represented about $20 billion annual revenues at its peak. 

One major trend is for wide area network data transport to shift from a “service an enterprise buys” to a “capability supplied by our own private network.” Big content and app providers now are the primary drivers of WAN capacity needs, and it is cheaper for such firms to build and own their own WANs than to buy capacity on the open market.

source: TeleGeography

In the 21st century, WAN traffic has moved steadily in the direction of carriage on private networks owned and operated by major application providers, and away from the public networks offering internet backbone carriage. In large part, that is because big app and content providers rely on data centers and cloud computing to support their businesses. 

By 2016, more than 70 percent of all internet traffic across the Atlantic was carried over private networks, not on public WAN networks. Obviously, that also means no revenue was earned directly by public service providers for carrying that traffic.

On intra-Asian routes, private networks in 2016 carried 60 percent of all traffic. On trans-Pacific routes, private networks carried about 58 percent of traffic.

In other words, far less traffic now moves over public networks than once was the case, a development with important revenue and business model implications. To a growing extent, private networks are displacing WAN services.  

The point is that important enterprise services produce revenues for service providers that are smaller than you might think, despite the huge growth in WAN traffic, cloud computing capacity and shift to “everything as a service.”

Such services as SD-WAN and unified communications as a service (UCASS) are vitally important for some suppliers, to be sure. But the size of those markets, in the context of total communications revenues, is fairly limited. And a substantial portion of such revenues are actually earned by suppliers of “do it yourself” network infrastructure. 

Wi-Fi is virtually mission critical, for example, but revenues are mostly earned by equipment, chipset and router suppliers, not service providers. 

On any IP network, it is possible to create network functionality at the edge, using owned customer premises equipment (routers, for example), without buying a turned up service supplying the equivalent functionality. That shifts revenue from service providers to gear suppliers. 

Also, the economics of infrastructure make owning a more-affordable solution than buying service in a growing number of cases, for WAN capacity as well as for UCASS. 

In high volume, owning gear and creating your own services still makes sense for large enterprises. Managed services tend to make more financial sense for smaller users. Larger enterprises also now find they can build their own servers and routers instead of buying them. 

All that illustrates why enterprise spending on connectivity services is not indicative of the value derived from those purchases. Nor are connectivity, UCASS or SD-WAN markets directly correlated with traffic volume. “Do it yourself” has become a material driver of public market services demand.