How Much Will IoT Lift Connectivity Revenue?

In some ways, trying to estimate connectivity provider revenue from internet of things devices is difficult. Some consider PCs and smartphones part of IoT, or tablets and other internet media devices. Some consider smart watches IoT devices. I personally do not use that definition, which seems to me to be legitimate as a way of describing “devices connected to the internet,” but not IoT. 

My own definition is narrower, essentially representing machines that talk to other machines, without direct human input. Sensors are the best example, whether industrial, automotive, for parking, traffic control, temperature monitoring, vibration monitoring, battery status or machine functioning. 

Devices supporting “smart home” or anything else “smart” (parking meters, traffic cameras or home security) would be IoT. There are other issues.

source: Strategy Analytics 

Many IoT sensors will not require their own internet access connections, which drive incremental revenue for connectivity providers. They can use Wi-Fi, short range connectivity such as near field communications or Bluetooth, for example. 

In some cases they might use Ethernet connections. In other cases specialized low power wide area networks will supply the connectivity, not a fixed telecom network or a mobile network. 

The point is that an IoT device connected to the internet does not automatically represent an incremental revenue opportunity for a service provider (telco, cable, satellite or LPWA provider). This breakout by IoT Analytics is similar to my own approach, and does not count smartphones, tablet connections, PC connections or fixed network voice connections. 

source: IoT Analytics

In fact, most IoT connections will not use a telco, cable, satellite or LPWA connection, but only a local wireless connection. Those devices will, in an indirect way, make use of whatever internet connectivity circuit happens to be purchased by the person, household or organization or business. The key point is that an IoT connected device does not automatically create an additional service provider access circuit. 

The IoT Analytics forecast suggests somewhere between 25 percent to 30 percent of IoT devices will require a dedicated access connection. 

 

source: IoT Analytics

Source

The point is that definitions matter where it comes to estimating the number of connected IoT devices in use. Connection choices likely are even more important. Not every IoT device--perhaps most--will need its own dedicated connection, which has implications for connection revenue upside. 

In Some Ways, Covid-19 Was a Non-Story for Service Providers

Over the last six months, as AT&T--like most other service providers--encountered an unprecedented change in end user demand caused by mandatory work from home and stay away from school rules, usage patterns changed, generally in the direction of more data and communications demand. 

source: AT&T 

Two observations are in order. The biggest non-story globally was that the sudden shift in demand would crash networks. That did not happen. Data centers and networks were configured with enough capacity to handle the sudden increase in demand without crashing. 

Observers generally agree that what we saw was a change in one month that might have been expected to take a year. But nobody now believes the demand curve has changed. We simply saw a sudden step change, but on the same growth curve as before.

The second incorrect story is that, with all the new demand, service providers “must” be making more money. In all likelihood, virtually all connectivity providers will report revenue declines. 

If you think about it, that just makes sense. Higher demand, as we all know, does not mean “higher revenue.” Usage is not revenue. No service providers, to my knowledge, actually raised rates. Conversely, many service providers temporarily removed data usage caps. So higher usage could not drive higher revenues.

Also, the sudden shuttering of nearly all businesses in many markets seems to be driving huge numbers of small businesses into bankruptcy. That means lower demand. And while it is unlikely that enterprises cancelled service, if there were revenue-generating services that actually are usage based, that also would put pressure on revenues.

Also, it seems most workers who stayed home already had broadband connections, and did not create a burst of new demand. It is likely that there will be some uplift from customers upgrading service plans to higher tiers of service that do generate more revenue. 

The bottom line is that it is unlikely connectivity providers will get a revenue boost from the pandemic-driven increases in traffic. Virtually all should see revenue declines, or at the very least a less-robust rate of revenue growth. 

Also, many in the business-to-business portions of the business anecdotally are mentioning cancelled deals and delayed deals. Those developments also will depress revenue and growth. 

Are FTTH Best Days Behind it?

For all the justifiable importance of optical fiber access in telco networks, it is possible to make the argument that fiber-to-home investments will be relatively muted, globally, as priorities continue to shift elsewhere. The simple observation is that most of today’s revenue is earned on the mobile network, not the fixed network, and that tomorrow’s revenue might well be earned elsewhere than from mobile connectivity itself. 

Assume this EY forecast of telco capital investment is correct. Assume the orange bars include local access network capex (mobile and fixed), while the green bars are investments to support edge computing, cloud infrastructure or content delivery networks. The EY forecast suggests that investments in the access network are going to drop, to support other initiatives. 

source: EY 

In part, one might argue that access capex will drop because some big 5G builds will be tapering off, allowing more investment in complementary assets (edge computing, content delivery infrastructure, analytics and other investments) to support new revenue opportunities. 

The EY forecast likely includes both fixed and mobile network capex, plus support for any related businesses telcos might be in (data centers, for example), plus the other investments in information technology telcos make (buildings, rolling stock, computing infrastructure not directly related to the network). 

Still, mobile capex tends to dominate global telco capex, as this forecast by Infonetics suggests. Virtually all fixed network investment these days is for broadband, as voice and other services simply are carried over the broadband infrastructure, while investments to support voice are nil. 

In fact, fixed network capex has dropped dramatically since about 2000. 

source: Market Realist

That capex profile parallels the revenue generation profile for telcos globally, where almost all the revenue growth comes from mobility and mobile broadband, compared to fixed network broadband and voice.  

source: Infonetics 

And one implication of the limited capex for fixed networks is that there is probably not going to be much expansion of current modernization efforts (replacing copper with optical fiber to the premises). 

That is especially the case if one assumes that overall capex climbs dramatically, as the EY analysis suggests. 

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What U.S. Cellular, Ericsson Millimeter Wave Fixed Wireless Test Shows

Ericsson, Qualcomm Technologies and U.S. Cellular say the companies have successfully demonstrated the first extended-range 5G NR millimeter wave broadband connection in the United States, on a commercial network, at a distance of five kilometers, delivering speeds of 100 Mbps. 

You might not find that remarkable. The networks are supposed to work, after all. But the test suggests that millimeter wave 5G, often thought to be a tool for urban, high-density applications, also can be used in many lower-density geographies as well. The test implies a single 5G millimeter wave cell can serve an area of 10 km diameter, or about six miles. 

Three miles might not seem such an important distance, but it roughly mimics the reach of a fixed copper network from a central office or remote node. The point is that 5G NR using millimeter wave spectrum might work in many medium-density rural areas. 

As Ericsson has argued, fixed wireless is feasible in at least three basic situations. Where density if high enough, fixed wireless can support speeds between 100 Mbps and 1 Gbps and where customer spend is between $50 and $100 a month.

In some other cases, depending on the competitive situation, fixed wireless could supply 50 Mbps to 200 Mbps speeds at prices between $20 to $60 a month.

In highly rural areas, where fixed network costs are prohibitive, fixed wireless could supply broadband access at speeds between 10 Mbps and 100 Mbps for monthly retail rates between $10 and $20. 

The “sweet spot,” most might agree, is suburban markets with medium density. Urban areas generally have access to fixed network access from two or more providers where fixed wireless might not have value proposition advantages. 

Rural markets might have reach issues which make fixed wireless difficult. Many suburban markets, though, might have competitive settings where fixed wireless would be a competitive offering for much of the market where there is significant demand for service between 50 Mbps and 200 Mbps and recurring prices between $20 and $60.

In the U.S. market, where cable operators have 70 percent of the customer base, and are getting virtually all the subscriber growth, there may no longer be a sustainable business case for telco fiber to the home. In that case, 5G and all next generation mobile platforms might be the only sustainable option for mobile or fixed network providers who want to compete with cable company offers.

What No Fixed Network Telco Exec Will Ever Say; and What they Will Say

You are likely never to hear the CEO of any large U.S. telecommunications company with a fixed network, and serving consumers, ever admit that the fixed network actually has no hope of reversing the lead cable operators have in fixed network broadband.

What you will hear are mobile executives, and executives from firms with both fixed and mobile operations, talking up the ability to use 5G networks as a functional substitute for a fixed network. There is a reason that happens. There arguably is no chance telcos now can recapture market leadership in fixed network broadband.

And the simple fact is that cable companies have been the market share and installed base leaders for more than 20 years, with a lead that likely cannot be reversed by the leading telcos, and possibly not sustainably by many other fixed network competitors at scale, operating without public subsidies of some sort.

U.S. mobile operators are optimistic about both 5G and future networks past 5G because their futures rely on expanding the range of use cases for mobile connectivity and the extent to which mobility can become a platform of sorts. For legacy providers AT&T and Verizon, both of which have mobile and large fixed footprints, 5G matters because it drives revenue growth for each of them. 

Consider that a global strategic imperative as well. By 2020, mobile accounted for more than half of all of Internet access revenue in more than 75 percent of countries, researchers at PwC said early in the year. Some analysts noted mobile Internet access revenues already had surpassed fixed network broadband revenue as early as 2013 or 2014.

That trend is expected to continue. By 2024, consultants at PwC say, mobile revenue will account for 68 percent of global Internet access market revenues. In other words, more than two thirds of all internet access revenue globally will be generated by mobile internet access. 

source: PwC 

For attackers such as Dish Network and new incumbent T-Mobile, 5G and future platforms will matter for a couple of reasons. Both Dish and T-Mobile are “mobile-only” providers, while AT&T and Verizon have both fixed and mobile assets. So the ability to leverage 5G and future networks to create substitutes for fixed network services is a major opportunity to enter a whole set of markets previously unavailable to them. 

There is more. At this point, there seems little chance for telcos to actually reverse their fortunes in the fixed networks broadband business. As they continue to lose market share, the economics of the broadband business get worse, as more assets are stranded, forcing the recovery of capital investment from an ever-smaller number of customers. 

And since broadband now has become the single most important service offered by any fixed network, for business or consumer customers, the largest fixed network providers are in something of a box. 

To compete with cable operators would require more capex than they can hope to recoup. In other words, in the U.S. market, it appears too late to regain leadership from the cable operators in broadband services offered by the fixed network. 

There is a bit of an analogy in the U.S. fixed network internet access market. U.S. cable operators have 70 percent of the installed base or market share, telcos and all others just 30 percent, according to researchers at Leichtman Research. 

Moreover, cable continues to get virtually all the new net account or subscription gains, and cable operators have been the market share growth leaders (net additions) and installed base leaders (total accounts) since at least 1999. 

source: NTIA

source: NTIA 

In other words, U.S. cable operators actually have been the market share leaders (growth) and installed base leaders (total accounts) for more than 20 years. Put another way, telcos and others have been searching for some way to create a platform that could compete with cable sustainably. 

One might think the answer always is “fiber to the home,” but that is where the business model becomes an obstacle. Given the lead cable has, it is unclear whether telcos could ever catch up, as cable continues to grow and invest in features of the hybrid fiber coax network that competes well with what FTTH provides, and does not have an insurmountable business sustainability issue.

And all that is why both legacy and attacking mobile service providers are betting so heavily on 5G and beyond. Having lost the ability to catch up with cable in fixed network broadband, they are forced to hope that the wireless and mobile platforms can emerge as functional substitutes for fixed network broadband.

PTC Frictionless Business Webinar Series Launches

PTC has launched a new webinar series on the theme of Frictionless Business™. The first session is today, Tuesday, 15 September 2020, from 14:00-15:00 Hawaii Standard Time, and looks at the impact of Covid-19 on data centers and networks. Register here.

Business friction is anything that prevents a potential customer from buying your product or service. 

As a practical matter, if frictionless business were possible, it should lead to outcomes such as higher lead-to-customer conversion rates, lower churn and higher account retention, plus higher renewal rates, as well as enhanced productivity (the ability to produce and sell more while reducing the cost of doing so). 

And that is why PTC’s new webinar series will focus on frictionless business, examining from many angles key strategy, product development, technology, distribution channels, marketing, customer service, governance, human resources, capital resources, information technology, customer segmentation and supply chain issues, all with the objective of helping attendees understand how to operate more effectively.  

The kickoff session will examine the impact of COVID-19 on data centers and network infrastructure, looking at opportunities and challenges. 

The following event will focus on network evolution, while the third installment will look at finance and investment issues. Frictionless business is the theme that unified all the sessions for a fundamental reason. 

As the second law of thermodynamics and second law of motion suggest, all business efforts to achieve a result are resisted. Obstacles might be lack of human or capital resources, competitor market domination, inefficiencies in supply chains or sales channels. 

So an unstated objective of every organizational action in support of its mission and goals is the effort to to overcome inertia and friction. A frictionless business might use artificial intelligence or machine learning to achieve:

• 100-percent efficiency and knowledge of buyer demands, preferences, tastes

• complete understanding, in real time, of the state of a firm’s supply chain

• as-good-as-can-be-expected employee productivity, based on knowledge of actual behavior

• full effectiveness of all information technology systems, devices and software

• real-time knowledge of any legal or regulatory compliance issues

• Robust feedback loops and intelligence gathering that aids in the development process for new products and features 

Additional installments might look at stakeholder issues, applied machine learning, internet of things, edge and cloud computing and changes in industry business models and opportunities.

Frictionless business is the sum total of all actions any business can take to create and keep customers, increase the volume of products sold to those customers with acceptable profit margins, maintain or grow market share with superior return on investment. 

Frictionless business reduces every barrier to business success, allowing firms to operate more effectively--doing the right things--as well as efficiently, with minimal waste and maximum productivity. 

Companies that operate with less friction are able to achieve superior results with less resource intensity. And that is why PTC’s webinar series is about frictionless business. 

Work from Home Winners and Losers?

Most technologies are complementary to others. We have a need for transportation, but many modes to fulfill that need. 

But one can always get a vigorous debate about the degree to which conferencing platforms can permanently replace face-to-face interactions. Nearly two thirds of all current jobs cannot be done remotely, a study by the U.S. National Bureau of Labor Statistics estimates. Other studies also estimate that about 34 percent of jobs could be done entirely from home. 

That probably is not the point. Most people seem to agree that information and office workers will continue to do some work from home, some of the time, and likely more in the future than they have in the past. A related issue for firms and organizations is the degree to which conferencing can permanently replace travel and face-to-face meetings.

It might be fair to note that “Zoom fatigue” reflects the preferred communications methods workers express. A study sponsored by Adobe found that in-person communications by far tops videoconferencing, by about a 28:1 margin. 

That arguably is most important in new business relationships, where establishing trust is essential, and less important for internal company or organization meetings where relationships are well established. 

source: Adobe

We do not know the answer to the question of how effective remote work will be, in the future, compared to older patterns.

Many are optimistic about permanently changed work patterns, where many people spend more time working from home; less in the office. As always, there are likely to be winners and losers, as there always are whenever decisions are made. 

Based on prior research, it might be argued that younger workers, earlier in their career, are at greater risk than more-established workers.  “We argue that face time helps employees to receive better work and leads to career advancement,” researchers said in a 2018 study. 

“When employees are geographically distributed from managers who control the assignment of work, they are often unable to display face time,” and that can inhibit career progress, researchers say. To be sure, some might argue that videoconferencing is a form of “face time.” 

“Employees who work remotely may end up getting lower performance evaluations, smaller raises and fewer promotions than their colleagues in the office, even if they work just as hard and just as long,” said researchers Kimberly Elsbach and Daniel Cable. 

“Companies rarely promote people into leadership roles who haven’t been consistently seen and measured,” Jack and Suzy Welch have argued. “It’s a familiarity thing, and it’s a trust thing.”

“We’re not saying that the people who get promoted are stars during every ‘crucible’ moment at the office, but at least they’re present and accounted for,” the Welches say. 

To the extent that work from home becomes a full-time pattern for many workers, we should expect to see winners and losers. Younger workers and new hires might fare less well than more-established or older workers.