Why Some Service Providers are More Positive on Fixed Wireless Than Others

Connectivity provider strategy choices virtually always are a combination of necessity and opportunity; constraints and advantages. Consider the view T=Mobile, Verizon and AT&T have about upside from 5G fixed wireless. T-Mobile is arguably the most bullish; Verizon is hopeful but AT&T is a skeptic. 

Sometimes choices are dictated by political choices. In any effort to win approval of its merger with Sprint, T-Mobile promised to supply fixed wireless home broadband service to 10 million homes by 2024. AT&T likewise uses fixed wireless (generally using its 4G platform) as part of a commitment to rural broadband--and receipt of government support funds--it made in 2015.

Neither of those moves is necessarily driven by a strict profit-and-loss or revenue growth motivation. For T-Mobile, the fixed wireless commitment was essentially a bargaining chip to win government merger approval; for AT&T a way to honor a commitment made to get rural broadband funding. 

In other cases, though, market positioning dictates relative financial opportunity and therefore different strategies. T-Mobile, for example, has zero share of the roughly $115 billion annual revenues fixed network broadband access market. 

AT&T has about 14.6 percent of the U.S. installed base of broadband customers. Verizon has less than seven percent of the installed base. 

Compare that to Comcast, which has nearly 29 percent of the installed base, and Charter, which has 27 percent of the installed base. 

AT&T in the third quarter of 2020 had about 11 percent share of the new customers, while Verizon got seven percent of the new accounts. 

In large part, those  fixed network broadband figures are based on relative opportunity, as well as customer preferences. 

Comcast has (can actually sell service to ) about 57 million homes passed.

The Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

Verizon homes passed might number 18.6 to 20 million. To be generous, use the 20 million figure. 

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. 

T-Mobile has not historically been in the fixed network home broadband business and has passed zero homes. 

So what percentage of total homes does each provider pass? According to the U.S. Census Bureau there are about 137.9 million U.S. housing units.

Roughly 8.8 percent of units are not occupied, typically. Vacant year round units represented 8.8 percent of total housing units, while 2.6 percent were vacant for seasonal use. 

Add it all up and 88.6 percent of the housing units in the United States in the first quarter of 2020 were occupied and 11.4 percent were vacant, according to the U.S. Census Bureau. 

Still, the addressable market therefore is about 138 million locations. Comcast passes perhaps 41 percent of U.S. homes; Charter passes perhaps 36 percent; AT&T passes possibly 45 percent of home locations while Verizon passes perhaps 14 percent, best case, and many of those locations are high-rise buildings where fixed wireless might not be the best access medium. 

So one way to look at 5G fixed wireless is the ability to take market share away from other providers. T-Mobile can win the most, in the sense that it can grow from zero share to some share. 

Charter and Comcast have market share that is outsized in comparison to their homes passed totals, getting roughly 70 percent of the potential market as customers. 

Verizon’s opportunity is dictated by geography. It has the smallest geographic footprint of any of the other tier-one suppliers. That means the use of its nationwide 5G network to supply home broadband gives it reach to most of the country it cannot presently serve. 

Aside from T-Mobile--which has zero fixed network share or network--Verizon has the greatest potential account upside from providing services outside its fixed network footprint. 

AT&T, on the other hand, already covers the greatest percentage of U.S. homes, and therefore has the most to lose from competitors, followed by Comcast and Charter. Verizon and AT&T earn relatively little from their fixed network customers and therefore are most interested in their mobile customer bases, which provide virtually all the incremental revenue growth for each firm. 

Still, the ability to use the 5G mobile network to attack the home broadband market is interesting to T-Mobile and Verizon for reasons related to geography. 

T-Mobile is solely a wireless provider, has no retail fixed network and therefore stands to gain by taking share in the former fixed network broadband business. Verizon has the most-limited geographic footprint of any of the other providers, and therefore has the most to gain from out-of-market share gains in the fixed wireless space. 

Comcast and Charter remain focused--even for mobility services--on customers in their own regions and areas of service. Operations out of existing markets continue to hold little--if any--appeal. 

Some cable companies who operate in rural areas have said they will use fixed wireless rather than hybrid fiber coax or fiber to the home as an access technology in lower-density areas they might be able to reach using wireless. 

The point is that tier-one service provider interest in 5G fixed wireless depends on their assessment of relative financial upside; in some cases regulatory postures; to a great extent existing and possible market share in home broadband and relative expectations about revenue contributions from fixed network services generally.

60% of Small Businesses Closed for Covid-19 Will Never Reopen

Though mobile roaming revenues are a likely short-term hit to connectivity service provider revenues, business failures are going to be a longer-term issue for service providers serving the small business customer. 

Yelp’s September 2020 report on Covid-19 impact suggests 60 percent of businesses closed because of government edicts will never reopen. By the end of August 2020, Yelp found 163,735 businesses had closed since the beginning of March 2020.

Yelp says nearly 98,000 of those closures already are permanent. The heaviest blows have fallen on restaurants and retailers. Bars and other nightlife businesses also have suffered, but the restaurant segment is six times that of the “bars and nightlife” category, Yelp notes. 

source: Yelp 

source: Yelp 

source: Yelp

Frictionless Business and "Digital Transformation"are Not Identical

“The Covid-19 crisis has validated and accelerated our move towards, what we call the frictionless enterprise, one in which information flows seamlessly between people and processes, intelligently, and as and when it is needed, to create effortless, touchless, and “frictionless” operations for our clients,” says Lee Beardmore, Capgemini VP.

Frictionless business does not mean  the arbitrary application of technology, rules, or processes that might generally be called digital transformation. 

Rather, frictionless business requires new, digital ways of thinking and working, combined with the capacity to constantly adapt itself to new contexts, he argues. In other words, it does not help to digitize inefficient or ineffective processes. That simply further institutionalizes bad practices.

The key is not simply to digitize existing processes, but transform them in ways that produce higher value, at equivalent or lower cost. 

In most cases, the move to more-frictionless operations is based on more-liquid information flows. That means seamless interactions between people and processes that create effortless, touchless operations that contribute to value creation. 

Even frictionless information flows do not produce value if unharnessed to the key resource-generation engines. As computer scientists always have said, “garbage in, garbage out.” 

Even the removal of friction does not help if the processes do not create value. And some processes create much more value than others. Assuming it can be done, moving swiftly to transform 20 percent of processes makes sense--even if the other processes are left alone--if that 20 percent produces 80 percent of the financial return. 

Those of you familiar with the quality control framework Six Sigma or the ISO-9001 certifications know those systems require documenting processes so they are repeatable. What neither does is begin with a different set of questions: should we be doing things this way in the first place?

Being systematic and having repeatable processes--all things being equal--is aimed at enhancing quality over time. But that arguably is true only if the repeatable processes are harnessed to the core value-creation engine. 

A frictionless business operates not only with minimal internal obstacles--efficiently--but also prioritizes those operational practices that produce the greatest firm value. Beyond efficiency, which is doing things with least waste, it is more important to be effective: doing the right things.

It might be a truism that friction reduction typically requires digital sophistication. But digital processes--in and of themselves--are not sufficient to create value. What matters is reducing friction where it produces business value: reducing the costs and time of responding to customer demand for the core profit-producing products.

Why 5G Home Broadband is Such a Big Deal

Some might have doubted Verizon’s commitment to home broadband services provided by the millimeter wave platform. But CEO Hans Vestberg argues that the home broadband effort is just beginning.

Verizon says it plans to”almost double the amount of 5G Ultra Wideband sites” in 2021, adding 14,000 new sites during the year. 

“We're building it (Ultra Wideband) mainly in the very dense urban areas and then in stadiums, et cetera, in the beginning,” said Vestberg. “So, we covered less of houses or residentials in the beginning.”

That makes sense. Building a new access network makes most sense in the densest areas or highest use areas, as that is the fastest way to create coverage of potential customers. In the case of the millimeter wave network, that means the dense areas where there are capacity issues (downtown urban cores, stadiums, other hotspots of demand). 

For mobile networks as a whole, one tends to build first also along major traffic routes. Millimeter wave is not ideally suited for such coverage, nor are drivers in moving vehicles typically using apps requiring unusually high capacity. That tends to happen at stationary locations (home and office). 

As the densest areas are built out, architects tend to roll to the next targets of opportunity, often suburban areas. 

And though some will question how effective millimeter wave fixed wireless will be as an alternative to fiber to the home, at least on the speed front, Verizon might be doing quite a bit better than originally forecast. 

“I remember when I talked about Ultra Wideband reaching maybe one gigabit per second, now we're up to four, five,” said Vestberg. So where some might have argued 4G fixed wireless would make sense for the value portion of the consumer market, 5G fixed wireless might well prove to be a full competitor to cable modem platforms, in terms of speeds and retail price. 

So the argument for fixed wireless is that it is in many instances the only way telcos can compete with cable, the market share leader. In other cases, new entrants, with zero share of the home broadband market, will gain simply by taking market share in a new line of business. 

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. 

This is a big deal, as fixed wireless might allow telcos to reverse a 20-year trend of losing market share to cable operators in the home broadband business. And it does not take much share shift to really make a difference. 

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. 

At the moment, it is conceivable that about four percent of U.S. consumers buy gigabit internet access. Perhaps 58 percent of U.S. consumers buy services with speeds between 100 Mbps and 300 Mbps. 

That makes 5G fixed wireless a competitor for at least 58 percent of the market, even at lower speeds. 

Most likely, the center of gravity of demand for 5G fixed wireless is households In the U.S. market who will not buy speeds above 300 Mbps, or pay much more than $50 a month, at least in the early going. The reason is that that pricing level and downstream bandwidth fits the profile of 5G fixed wireless using mid-band spectrum.

Verizon fixed wireless offers also suggest that same 5G “sweet spot” in the market. In the meantime, there is 4G fixed wireless, which will have to be aimed at a lower-speed portion of the market, albeit at about the same price points as 5G fixed wireless. 

Up to this point, Verizon 4G fixed wireless, available in some rural areas, offers speeds between 25 Mbps and 50 Mbps. That might appeal to consumers unable to buy a comparable fixed network service. 

Later iterations using millimeter wave service will sometimes be a more-serious competitor to cable operator services operating up to a gigabit per second. 

Fixed wireless might be even more important elsewhere in global markets.  

There are roughly 99 million fixed network internet access accounts active in the U.S. market. If fixed wireless manages to shift about 12 million accounts, that is a potential gain of 12 percent.

If 80 percent of that shift is from cable operators to telcos, implying a shift of 9.6 million accounts, that would mean a loss of 15 percent cable TV market share in internet access. 

For T-Mobile, the upside is equally important. T-Mobile has zero share of the home broadband business, representing about $115 billion in annual revenue. My own rule of thumb is that a U.S. tier-one service provider cannot bother with incremental new revenue sources worth less than $1 billion in annual revenues. 

Fixed wireless easily meets that test at a gain of just one percent of existing U.S. internet access. T-Mobile only has to get one percent market share to increase revenue by more than $1 billion annually. 

In fact, some might well argue that the upside from fixed wireless has more impact on firm earnings than does 5G for mobile service. A mobile data account might represent $20 in monthly recurring revenue. A home broadband account represents somewhere between $40 and $80 in recurring revenue. 

So a single home broadband account represents between twice and four times the revenue of a mobile account.

Why "Digital Transformation" is Destructive of Connectivity Supplier Value

The advice to “go digital” or “digitally transform” is almost meaningless these days. Such advice is right up there with “work smarter, not harder” or “focus on what you do best.” The advice--while reasonable--is too general to be of much value. 

In the internet era, the overlooked observation is that “digital” might actually destroy supplier value, even as it increases end user value. We have seen this process at work in music, publishing, video subscriptions, retailing, the travel bookings business, ride sharing, lodgings and communications. 

source: McKinsey 

Once upon a time, the sole lawful provider of “voice service” was one telco in each country. At one time the sole providers of mobile “messaging” were mobile operators. In the past, only one supplier could provide “broadband” data access or private wide area networks. 

“Digital” has eroded service provider value as the main or sole providers of voice, messaging, private network services or broadband internet access, allowing third parties to supply those values, with diverse business models. 

One way of describing this process is to say “digital is destroying economic rent, which is profit earned in excess of a company’s cost of capital.” In other words, digital transformation--intended to help firms improve or save their business models--might often only hasten their demise. 

Among the reasons for the danger is that digital processes tend to create more value for customers than for firms, says McKinsey. 

The “consumerization of information technology” involved employees bringing their own consumer tools and using them at work. In many cases, the consumer tools were better than the business tools. That also forced suppliers of enterprise IT to essentially compete with lower-cost consumer offers, shrinking markets, revenue and profit margins in the process. 

Digital also renders distribution intermediaries obsolete. That process, known as disintermediation, devalues the function of distribution or retail channels. 

“Competition of this nature already has siphoned off 40 percent of incumbents’ revenue growth and 25 percent of their growth in earnings before interest and taxes (EBIT), as they cut prices to defend what they still have or redouble their innovation investment in a scramble to catch up,” McKinsey argues. 

The lesson is clear enough: digital shifts value within the ecosystem. Companies and industry segments that captured the value that was left often came from a completely different sector than the one where the original value pool had resided.

Also, to the extent that digital economics rely on network effects--and therefore scale--scale providers tend to win disproportionately. And those providers tend to be app providers whose products are consumed over the top on all internet access networks. That is another way value shifts from one industry segment to others. 

So what does “digital transformation” really mean for connectivity service providers. On the operational side of the business, more efficient and therefore lower-cost operations are the hope. 

On the strategic side of the business--the core business model--digital transformation might be malignant, in the sense of allowing value--and revenue upside--to migrate to other parts of the value chain. 

So digital transformation is, at best, a useful operational tool. On a strategic level, the shift to digital arguably destroys value for the connectivity business. 

The logical firm responses range from cost cutting to asset divestitures to acquisitions to gain scale to redeploying capital in adjacent and new business roles. 

But the notion that digital transformation is universally valuable for connectivity providers arguably is false.

What Remote Work Impact on Social Capital?

It will be some time before we can assess the permanent impact on work patterns post-Covid, though the conventional wisdom is that there will be less “in the office” work and more flexibility about the balance of “in office” and “from home” patterns; less business travel and more substitution of conferencing, as some have recommended or predicted for several decades. 

Social capital is the issue. Social capital includes "the networks of relationships among people who live and work in a particular society, enabling that society to function effectively,” Wikipedia says. “It involves the effective functioning of social groups through interpersonal relationships, a shared sense of identity, a shared understanding, shared norms, shared values, trust, cooperation, and reciprocity. 

Most of us would argue those are important underpinnings of organizational success. And loss of social capital therefore becomes an issue when remote work is the norm. It simply is not clear that the same amount of social capital can be created or maintained in a fully-remote organization. 

Many important debates will happen around the impact of remote work and use of communications as a substitute for travel. Will productivity be affected, positive or negative? What else in the business model could change? Will firms need less office space, the same or possibly even more? The latter might seem an inconceivable outcome, but if economies and firms keep growing, they should require more office space, no matter how work patterns are changed. 

One key issue, assuming there is a permanent shift to remote work, is the impact on the soft and subtle values of face-to-face collaboration. Our expectations about what facilities such interactions can be quite wrong. Consider the thinking behind “open office” floor plans.

In “The Truth About Open Offices,” Ethan Bernstein and Ben Waber, the president of Humanyze, a workplace-analytics firm, tracked face-to-face and digital interactions at two Fortune 500 companies before and after the companies moved from cubicles to open offices. 

“We found that face-to-face interactions dropped by roughly 70 percent after the firms transitioned to open offices, while electronic interactions increased to compensate,” they said. In other words, open offices actually decreased face-to-face interactions, in the same office settings. 

People began to retreat, using electronic communications instead of physical contact, inside the same office spaces. So the virtual workplace, instead of complementing the physical one, had become a refuge from it.

We do not yet know what might happen to the social interactions--or social capital--between people inside firms where virtual work sites are the norm. Weaker bonds between people are a possible outcome. What impact that could have on firm success, productivity or innovation is yet to be determined.

Will "Most Businesses" Maintain or Increase IT Spending in 2021?

Small and medium businesses in Australia and New Zealand indicate they will maintain technology spending in 2021, according to IDC, with the Bell curve of responses centering on “stay flat” and “increase up to 10 percent.”

So does that mean "most" businesses will behave that way? We cannot say, as few concepts are as wiggly as the definition of "small and medium business."

source: IDC 

The important footnote--as always with the SMB category--is that the IDC definition of SMB is a firm with “fewer than 500 employees.” In most countries, firms with more than a dozen to a few dozen employees are quite rare. 

Keep in mind that in many parts of Australia, 97 percent of all firms have fewer than 19 employees. There are almost no “medium” sized firms (or large firms) in the range identified by IDC, in western Australia, for example. 

source" Small Business Development Corporation 

In many Organization for Economic Cooperation and Development countries, there are not so many firms in the size range of “at least 250 employees.”

In Canada, 98 percent of firms have 99 employees or fewer. 

The point is that IDC data skews towards relatively larger firms, not the “micro” enterprises that represent most “small businesses.”  So the findings about information technology investments will not apply to most businesses, by definition.