U.S. 5G Mid-Band Spectrum Might be an Existential Move

Are mid-band spectrum assets an existential matter for the likes of AT&T and Verizon? In other words, even if acquiring huge amounts of mid-band spectrum ultimately fails to produce significant new top-line revenue, must the investments still be made?

That would not be an unprecedented situation in the telecom business over the past nearly 30 years. Back in the mid-1990s, as one telco was pondering an investment in fiber to the home, the value of the investment was almost-entirely strategic, and not directly related to the more-mundane ability to boost top-line revenue.

One CEO, asked in private and off the record about the magnitude of FTTH investments, said the upside was “we get to keep our business.” Note: the argument was not “we will make more top-line revenue.” The justification was existential: “we get to stay in business.”

Specifically, FTTH would enable 10 Mbps data access--literally 10 Mbps--allowing the telco to hold its own versus cable TV operators in the internet access space and take some share in video entertainment, as it simultaneously lost share in voice.

Is that the same existential bet top U.S. mobile operators are making in investing heavily in mid-band spectrum?

And, if so, what are the implications for business models and firm fortunes at the top ranks of the U.S. telecom business? 

What are we getting wrong about 5G? Are we unclear about the value of other advanced technologies in the connectivity business and internet ecosystem? An experienced panel of industry analysts will tackle those subjects head on at the PTC'21 conference closing session . 

on Jan. 20, 2021. You can register here. 

Among the big topics certain to be discussed: is the global industry investing too much on 5G, without hope of return? How much capital can service providers really afford to invest in a mature business?

How big is the threat of service provider displacement from private 4G or 5G networks? What is the value proposition that might drive substantial numbers of enterprises to do so? 

Is there really serious hope of 5G revenue growth, or must we look at 5G capital investment as maintenance spending? 

As Matt Bramson, Cloud Strategy Solutions founder puts it: “what are the implications of these new technologies? What do you need to know when a board member asks you about them?”

When do you need to move; start investing; and why? What chasm has to be crossed?

Matt Bramson

Panelist Benoit Felten, Diffraction Analysis founder asks: “What 5G dangers lie ahead for regulators? What are they not seeing?” What are the possible impacts on market structures, need for consolidation or even ownership? And is there really significant revenue upside from new services?

Benoît Felten

In a mature business, how much capital can service providers actually afford to invest, asks Dan Hays, Strategy& principal. “What are the business and financial implications of huge amounts of capital invested in some 5G auctions?” 

“Can you afford to invest so much if there is no top-line growth?” Hays will discuss. 

Daniel Hays

Do big mobile service providers such as Verizon actually have a choice to invest heavily in mid-band mobile spectrum? Mark Lutkowitz, FibeReality principal, is not so sure. It fundamentally is an existential question. “Do you want to stay in business or not?”

What are the longer term implications of an inability to wring more revenue from such capital investments? Can the industry actually support multiple facilities-based competitors? 

Some of us remember roughly similar questions and answers asked about fiber to the home investments as well, back before the turn of the 21st century. 

Mark Lutkowitz

The large U.S. telcos invest about $10 billion in capex every year, Hays notes. The U.S. C-band auctions already exceed $80 billion in commitments. How big a burden might that be, even if the spectrum is essentially existential? After 82 rounds, about $81 billion has been committed by bidders in the C-band auction. 

In addition to those sums, roughly 16 percent to 22 percent more has to be added as the cost of clearing existing licensed users from the bands. In other words, existing bidders already are pledging between $94 billion and $99 billion for C-band spectrum, and the auction is not yet over. 

Many would argue that acquiring a trove of mid-band spectrum is existential for Verizon and AT&T, in the same way that fiber to the home was existential for some telcos. But that is quite a different rationale from arguing that the investments will drive top-line revenue, substantially reduce operating costs, significantly reduce churn or elevate marketing effectiveness. 

Those are among the weighty issues the panel will discuss.

Covid-19 Shifts Enterprise IT Spending

The Covid-19 pandemic apparently has hit enterprise spending on data centers the most, but also boosted spending on software as a service the most, the Flexera 2021 State of Tech Spend Report says. 

source: Flexera, ZDnet 

The Flexera 2021 State of Tech Spend Report is based on 474 responses from respondents who work in large organizations, with 52 percent employed at organizations with 10,000 or more employees, 68 percent from the Americas and the rest from Europe. 

As you might guess, there were big boosts in spending to support remote workers. 

source: Flexera, ZDnet

“Digital transformation” was the top priority for technology initiatives, along with cybersecurity and cloud computing. 

source: Flexera

U.S. Fixed Network Speeds were Highest in G-20 All of 2020

Some critics routinely criticize “slow” U.S. fixed network broadband speeds. According to Speedtest data, U.S. fixed network speeds were the highest of any G-20 country during 2020, and were already the highest in the G-20 countries at the beginning of 2020 as well. 

As the year progressed, the U.S. speed lead actually grew substantially. 

source: Speedtest

Consumer Mobility Will Not be Tomorrow's Revenue Driver

As hard as it might be to envision, mobile services that now drive revenue growth in the global telecom business will not always do so. Something--and we cannot say for certain what it is--will emerge as the revenue leader within a decade. For the past 30 years, that replacement process has happened with regularity.

Voice services once represented as much as 82 percent of total communications service provider revenues, as recently as 2004, according to International Telecommunications Union data. 

Mobile represented about half of voice revenues by that point. In 1990, mobile voice was in single digits as a percentage of total service provider revenue. 

By 2021, fixed network voice will represent only about 7.7 percent of total global telecom revenues, compared to mobile subscriptions at 59 percent of total, according to researchers at Ovum. 

The point is that connectivity provider service revenue sources have changed fairly fast since 2000, illustrating the strategic importance of developing new revenue sources in the connectivity business. 

Some 30 years ago, about 1990, mobile service accounts were in single digits, globally, as a percentage of total revenue. About 20 years ago--around 2000--mobile service revenues had leaped to more than 21 percent of total. 

By 2010, mobile service revenue had grown to a majority of total revenue, and also was providing as much as 80 percent of the revenue growth. 

About 2000, voice services represented as much as 89 percent of total global service provider revenues. By 2010, the revenue driver had changed to mobility services, with growing contributions from internet access. 

source: ITU 

According to researchers at IDATE, mobility represented about 80 percent of revenue growth, with 64 billion Euros generated by mobile services; 15.6 billion by all fixed network services. 

source: Idate 

Before 2020, mobile services revenue had become the revenue driver in every market regionally. 

source: Idate 

But mobility itself will be challenged as subscriptions and use of mobile internet access reach saturation. 

Those patterns illustrate a principle: telecom service providers have had to replace about half of total existing revenue every decade, since about 1990 at the very least. 

As a rule, I expect that any given communications service provider will have to replace half of current revenue about every decade. Among the best examples (because we have the data) is the change in composition of U.S. telecom revenues between 1997 and 2007.

Back in 1997, nearly half of total revenue was earned from “toll” services (long distance, including international and domestic long distance voice. Profits also were disproportionately driven by long distance services.

A decade later, toll service had dropped to 18 percent of total revenue, while mobile services had risen to about half of total revenues, up from about 16 percent of total.

In addition to mobility revenues displacing long distance, internet access began to build around 2000. Between 2000 and 2010, internet access had grown to represent 24 percent of total revenues.  

Voice is an essential feature of a mobile account, of course. But voice usage--as such--does not drive revenue. The reason is the low--and declining--prices of carrier voice services and substitution by over-the-top messaging. 

By 2021, fixed network voice will represent only about 7.7 percent of total global telecom revenues, according to researchers at Ovum. 

Fixed network broadband will represent 18 percent of total revenues, while subscription TV represents about 15 percent of total revenues.

Some Wholesale Voice Markets Remain Lucrative

Wholesale voice networks make most of their money in a handful of regional markets, and most of that is generated by users on mobile phones, TeleGeogrphy says. Sub-Saharan Africa represents six percent of the world's wholesale traffic, but accounted for 23 percent of wholesale voice revenues ($3.7 billion) in 2019. 

Countries in the Middle East accounted for six percent of world wholesale traffic, but 11 percent of wholesale revenues ($1.8 billion). The global market now represents about $16 billion in annual revenue, 

Wholesale revenues are bolstered by a select set of low-traffic routes with stubbornly high prices, TeleGeography says. The France-to-Tunisia route accounts for just 0.3 percent of international traffic, but, at $0.54 per minute, it provides three percent of all revenues. 

Conversely, the U.S.-Mexico route represents nine percent of all international traffic, but only 0.5 percent of wholesale carrier revenues.

As you would guess, consolidation has happened. In 2019, seven carriers represented more than 20 billion minutes of traffic, down from 11 networks in 2015. 

Among the nine largest carriers in the world, only one terminated more traffic in 2019 than in 2018.

Total global service provider revenue is a bit shy of $1.4 trillion, according to Statista. 

source: Statista. 

Where Can $400 Billion in New Telecom Revenue Be Found?

For more than a century, telco executives easily could identify who their customers were; what the main customer needs were; how telco products solved those problems and how those products created value.

Telcos also knew what they needed to do to create those values; their main tasks and partnerships. They knew how the business model generated profit. All those building blocks of their business model are going to be challenged in the next phase of industry evolution beyond core connectivity services.  

The next wave of problems concerns not only the creation of new connectivity service demand, but moves beyond the connectivity role, at least by the larger tier-one telcos. Small-firm strategy likely will remain focused on efficiency, acquisitions or market exit. 

Of course, the new business challenges necessarily include identifying who the new customers might be; how value can be created and delivered to them and how telcos can solve their problems. For the most part, none of those were huge challenges over the past century. 

source: BMI Lab 

Some might think much of that is a response to a world where demand is changed by the pandemic, but telecom executives have been dealing with issues far greater than Covid-19 for a few decades at least.

The ongoing problem is the exhaustion of successive waves of products and revenue, caused in part by market maturity and complicated by product substitution enabled by the internet. For two decades, as fixed network revenue has dwindled, global growth has been driven by mobility services.

Mobility services, in turn, have been driven by subscription growth, then text messaging, then internet access. Though some markets have matured sooner than others, the basic pattern is universal: connectivity service revenue has moved through several product lifecycles over the past few decades.

Fixed network voice peaked about 2000, after growing for a century. Mobile service then became the revenue driver. Fixed network broadband access has helped, but most people globally rely on mobile internet, and that seems unlikely to change too much in the future. 

What comes next is not so clear. If we assume that past patterns hold, and that most telcos will have to replace half of current revenue each decade, then any new revenue sources have to be big. And that is the issue. 

Edge computing, internet of things or private networks will help. But are they big enough new revenue sources to replace literally half of current revenue? Some might argue that is unlikely. 

Incremental gains are not going to be enough. Telcos are looking at generating new revenues to the tune of $400 billion in the next 10 years. If IoT or edge computing generate $10 billion to $20 billion in incremental new revenues, that helps. But it does not come close to solving the bigger revenue problem.

Perhaps some believe a combination of IoT, edge computing and virtual private networks will produce something resembling $400 billion in extra revenue within a decade or so. That seems quite fanciful. 

Which simply means there are other big new revenue streams to be discovered and created.

Telco Business Model Largely Unchanged after Covid-19

Business models in a post-pandemic environment might well require a rethink or at least re-examination of a few business fundamentals by many businesses.

It is not so clear that connectivity providers will face as much change from the pandemic, since the underlying industry dynamics were going to force major business model changes in any event, as a long-term matter.

The short-term impact, though, is likely what executives will be watching. 

Some might argue the pandemic created new demand for connectivity services. Others might argue that trend already was in place, and the pandemic simply shifted demand into a one-time, higher-growth posture. The typical way of expressing this is that service providers saw a year’s increase in demand in a couple of months. 

On the other hand, while subscription revenue might climb, other revenue sources will decline enough that overall revenue will drop because of the pandemic shutdowns.  

Few expected the advent of 5G to change consumer revenue upside very much. The potential for business customer value is viewed as much more significant, but up to this point, it seems unclear whether the pandemic has changed the demand for 5G by either consumers or businesses. 

The long-term view always has been considered more important, particularly as 5G becomes valuable in conjunction with edge computing, internet of things or virtualized network features. So far, it is unclear whether the pandemic has made any qualitative changes in those views. 

In the case of demand for broadband internet access, it is possible to argue that the business model remains intact. 

Telcos and cable operators arguably added new accounts at a faster clip than had been the case prior to the required work from home rules. But some also believe part of those gains was simply shifted forward in time. 

Broadband adoption also grew, but that is an on-going trend. In 2020, 86 percent of U.S. households buy an Internet service at home, compared to 84 percent in 2015 and 82 percent in 2010, according to Leichtman Research Group.

Broadband (minimum 25 Mbps downstream) accounts for 97 percent of households with an Internet service at home, and 83 percent of all households get a broadband Internet service – an increase from 81 percent in 2015 and 74 percent in 2010, LRG also says. 

Stronger demand for quality broadband at home or on mobile networks; across larger geographies; with faster upstream speeds or capacity seem reasonable enough outcomes. But those trends were already in place.

Consumption geographies could shift. There might be some slower or even reduced demand for capacity at business and urban locations, with more traffic generated in suburban and exurban areas; untethered or even rural areas. But those are subtle shifts which arguably do not change the business model. 

Essential stakeholder behavior change might be a bigger issue for retailers, content providers and travel industry participants.  

And what does not change? Which behaviors will return to former levels, essentially unchanged? Which patterns will return, possibly with equivalent magnitudes, but with at least some major changed behavior patterns? 

Connectivity providers do not seem worried about downside in such areas, since end user demand remained high--or increased--during the pandemic. Longer term changes--such as more remote work or less travel--would simply seem to sustain the new demand patterns. 

Most importantly, which behavioral patterns might disappear? ask Dev Patnaik, Jump Associates CEO, Michelle Loret de Mola, Jump Associates strategy director and Brady Bates, Jump Associates analyst. 

In the telecommunications business, the pandemic might have speeded up the underlying change processes, but not created new and unexpected demand. Use of the fixed network for voice has been falling for at least two decades. Substitution of demand for broadband internet access has been rising. Mobile communications usage has climbed as well. 

The shift from linear video entertainment to over the top streaming was already well in place. 

There is a reasonable argument to be made that video conferencing will displace some amount of business travel. Also, conferences that once were based on audio now seem to have shifted permanently to video formats. 

But how does that affect the connectivity provider business model? Arguably less than one might think, unless connectivity providers wind up owning the apps that most people use for such purposes. 

To the extent that preferences generally become habits, will pandemic behaviors tend to persist? Will product demand shift in some permanent ways, and if so, by how much? For retail connectivity providers, most of the preferences might be fairly subtle extrapolations from underlying trends. 

We might assume that new behavior patterns--and the buying choices that match those patterns--will be most sturdy when the new ways are perceived to be better, and also are easy to adopt and maintain. 

To the extent that employers broadly support increased work-from-home patterns, connectivity services might arguably acquire higher value, but not necessarily as a qualitative change from prior trends already in place, and probably not in quantities that change the existing business model.

What remains unchanged is the need for business model change for other reasons.

To the extent that mobile voice, then mobile broadband have driven global industry revenues for most of the last 20 years, and to the extent those services reach saturation, the question of “what comes next?” must be asked. 

That is why edge computing and the internet of things get talked about and examined so much, or why a growing number of telcos are diversifying into additional and different lines of business. 

Some trends in the global telecommunications business are obvious, even if local patterns can vary substantially. On a global basis, the fixed network voice business peaked around the turn of the century, and has been declining since then, according to International Telecommunications Union data. 

Use of the fixed network has gradually shifted to support for broadband internet access as voice subscriptions have fallen. 

source: World Economic Forum, ITU 

Mobile service now is the primary way human beings use communications and mobile networks increasingly are the way humans access internet apps and services as well. 

But as mobile accounts have exceeded 100 percent (accounts, not persons), and as mobile broadband (internet access) has climbed above 80 percent, the limits to either mobile subscriptions or mobile broadband as the industry revenue driver seem inescapable. 

Irrespective of the pandemic, the global industry still faces a serious search for the next revenue model beyond connectivity.