Business Voice Market is Substantial, "Lines" Less So

If the cloud-based PBX or hosted voice market grows as much as many expect, it will easily eclipse the value of the business phone system market. That could well be the case even if the number of new sales is roughly half owned switches and half managed services. 

On the other hand, hosted voice and PBX switch sales are likely to remain a small part of the overall unified communications market, now dominated by messaging and conferencing, and should remain a small part of the overall business voice market as well. 

It might seem logical that cloud voice services would displace nearly all premises switches and “do it yourself” business voice. But the key fact about hosted voice services is that they are more expensive, at scale, than use of a premises switch. 

In other words, large enterprises often save money by owning their own switches, rather than buying hosted services. 

source: Technavio 

In 2020, hosted PBX might have claimed 40 percent of all PBX services acquired by mid-market companies and 20 percent of new seats added by enterprises, according to Eastern Management Group. In 2010, hosted PBX was only four percent of all phone systems shipped. Now it’s 28 percent, Eastern Management says. 

source: Eastern Management Group 

A reasonable estimate of potential PBX and hosted voice market value is that the global business phone system market, plus UCaaS alternatives, in 2014, was less than $2 billion. Assume that is all fixed network related and represents “phone line” services. 

If every premises switch customer switched to UCaaS, that might suggest a potential global fixed network business phone line market between $2 billion and $3 billion, including both UCaaS and infrastructure (business phone system) purchases. 

The mobility business, and business fixed voice overall, arguably are far bigger revenue streams. 

Total global voice public network service revenue might be in the range of $175 billion a year, including consumer and business users. Mobile might represent about $115 billion of that, with fixed network voice contributing $59 billion. 

Assume business voice revenue is 30 percent of total. That implies global fixed network business voice recurring revenue of about $18 billion, with business mobile service revenue of about $35 billion. 

Contrast that with the estimated unified communications market--which includes those expenditures-- estimated at between $16 billion and $48 billion a year in revenues, or even total business and government spending on communications. 

source: Forrester Research 

The issue for communications service providers is that much of UC is a feature of an app, not a recurring service. 

Some might quibble about whether there is a difference between unified communications as a service and communications platform as a service, which includes a range of features or services including messaging technologies (text messaging or SMS, RCS (Rich Communication Services) and OTT messaging), push notifications, voice services and email, and represents service provider UCaaS. 

CPaaS generally is defined as cloud-based way of creating and delivering communication services, as opposed to a premises business switch, for example. Juniper Research argues that “the value of the individual services CPaaS offers is quite low, however.”

The specific value of business voice likewise arguably also is low, though a required feature of business communications. 

Indeed, email use is possible at almost zero incremental charge for enterprises, and often at zero incremental charge for consumers. Over the top messaging likewise often is available for no incremental charge for any consumer user, with some possible incremental charges for business messaging apps. 

Voice services might be available for use at zero incremental cost, negligible cost or relatively small cost. Many mobile service providers, for example, offer unlimited messaging and voice use in domestic markets, with affordable roaming charges. 

Voice assistants, including smart speakers, also increasingly are able to connect callers to public networks. In that instance, voice-enabled speakers simply operate as any other voice device able to connect with the public network and telephone numbers. 

Juniper suggests higher value--and implicitly higher service provider revenues--can be generated if the functions are bundled. Some will question the premise.

Unified communications have become “more unified,” adding more functions, over the last few decades. But most of the revenue still is earned by app providers or switch providers, not connectivity providers. 

Mobile video calling is mostly dominated by third party app suppliers such as Zoom, or enterprise calling services running over the top of standard internet connections. As always is the case, those apps, use cases and revenues do not flow to the access provider, but to the app provider. 

It arguably is the case that simple mobile service is a bigger revenue driver than UCaaS for connectivity providers. 

source: Juniper Research 

Voice is a Small Part of Unified Communications

Value and competition pose major problems for public network unified communications service providers, in part because voice services contribute relatively little to overall unified communications value and revenue.

And, historically, much of the demand is supplied by third party application, managed service or infrastructure providers. 

Business UCaaS often is provided by third parties and the market potential is bounded by the number of firms that can justify a UCaaS solution rather than owning their own switches. The other complication is that UCaaS includes both a “do it yourself” and a “services” segment, as enterprises often own their phone switches while smaller entities buy a managed service.

Consider the conferencing segment of unified communications. Audio conferencing arguably has been led by third party managed service providers, not telcos. 

A reasonable estimate of potential market value is that the global business phone system market, plus UCaaS alternatives, in 2014, was less than $2 billion. If every customer switched to UCaaS, that might suggest a potential global business voice market between $2 billion and $3 billion.

source: Global Market Insights 

So all the rest of UC revenue is something else: conferencing services and gear, access connections, messaging services or systems. The voice function, as such, is a small part of the overall UC market. 

Though historically dominated by enterprise DIY deployments and small business managed services, the big boom in video conferencing has been captured by third party services such as Zoom not traditional communications service providers. 

By some estimates, UCaas revenues in 2020 are about $16 billion. Others estimate revenue at $48 billion or higher amounts.  

Estimates often vary because different products are included in the definition. Some analysts consider access services used to support UCaaS--such as SIP trunks--as within the category. Others do not. 

The clear takeaway is that business voice revenues are a small part of overall unified communications demand, value and spending.

How Cloonan's Curve Suggests Cable Operators Can Extend the Life of HFC

Nielsen’s Law of Internet Bandwidth states that a high-end user’s connection speed grows by 50 percent each year, doubling roughly every 21 months. That suggests a top-end internet access connection in 2025 will offer 10 Gbps speeds in the downstream. 

But it is reasonable to assume Nielsen’s growth rates cannot continue forever, as 50 percent compounded growth without end has some physical limits (time, physics, cost, demand, substitutes). At some point, as was true with personal computer processors, parallel processing becomes the method for boosting performance, while raw processing itself loses relevance as a product differentiator. 

In the consumer internet access space, that suggests both new ways of supplying bandwidth, less value produced by ever-increasing speed offers and a shift to other forms of value. 

Nielsen’s Law only predicts the top speed available for purchase, however, not the average or typical speed a consumer might buy. It has taken quite some time for customer uptake of gigabit internet access services to reach as much as eight percent share of total, for example. 

Keep in mind that the first U.S. gigabit services began commercialization in 2013. It has taken seven years for adoption to reach eight percent of the installed base, in part because that grade of service is not universally available in the U.S. market, for example. 

Cloonan's Curve provides a way of estimating bandwidth speeds purchased by cable modem customers, in relation to the headline speed (Nielsen rate). Most customers do not typically buy the fastest-available service, as that also is typically the most-expensive tier of service. Instead, they tend to buy the mid-level service. 

The caveat is that Cloonan’s Curve obviously does not apply to service providers that sell only a single tier of service, at the advertised headline rate (“gigabit only,” for example). 

source: Commscope

This illustration of downstream bandwidth plans actually purchased by customers suggests that although both Nielsen and Cloonan rates increase at about 50 percent per year, most customers buy services that offer six times to 20 times less speed than the fastest-available service tier. 

Think of the fastest tier of service (1 Gbps, for example) as the “billboard tier” that is featured in service provider advertising as the “speeds as fast as X” rate. Then consider the “common or popular tiers” as those in the middle of the offered speed ranges. Then there is an “economy tier” for customers with light usage patterns, limited app requirements or willingness to pay profiles. 

That has implications for network planning, bandwidth upgrades and marketing. Internet service providers can advertise the headline speed knowing that a small percentage of customers are going to buy it. 

source: Commscope

Networks obviously must be designed to deliver the headline rate. But total bandwidth consumption, which affects the capabilities of the rest of the network, does not assume that every customer buys the headline rate service. Instead, the variable portions of the network can be designed on the assumption that most customers will, in fact, not buy the headline service. 

Since speed and data consumption tend to be correlated, that affects capacity planning for backhaul, for example. Simply, the Cloonan Curve informs thinking about how much capacity must grow to support the actual mix of demand from the full set of customers, based on their actual buying patterns. 

That is important to match capital investment as much as possible to the variable demands placed on the network by various customer groups. 

For a cable ISP, there are other implications. At some point, it will make sense to migrate the highest-usage customers--often identical with those buying the headline service--off the hybrid fiber coax network and onto a parallel access network using fiber to the home instead. 

It is common to find that the top one percent of customers generate as much as 15 percent of total network usage, for example. So moving those customers off the core network frees up considerable capacity for the rest of the customers, 90 percent of whom might be supported on the legacy access network. 

That allows a longer useful life for the HFC network, as most customers will continue to buy the popular and economy tiers of service that still can be supported using HFC. 

Nielsen’s Law does not account for upstream bandwidth, however. Upstream capacity tends to grow at about half the rate of downstream bandwidth, or about 25 percent per year. 

Customer behavior also varies. On cable networks, the heaviest users (one percent) of customers generate as much as 47 percent of upstream bandwidth. And it often is the case that 80 percent of total upstream capacity demand is generated by just 10 percent of total users. 

ISPs using telecom platforms also will confront that same general issue of bandwidth growth, and the differential demand for tiers of service. Fiber to home platforms keep increasing performance as well, and some suggest future performance will be boosted economically based on use in the local loop of components originally commercialized to support data center optics. 

That is why 25 Gbps passive optical networks initially deployed for business-to-business applications in the local loop will be powered by commercial availability of data center optical components, Nokia argues. Commercialization for B2B use cases should then be leveraged for B2C applications as well. 

Nielsen’s Law and Cloonan’s Curve also suggest the potential limits of HFC as a platform. If consumer usage patterns do not change; if ISP usage policies do not change; if app usage patterns do not change; if pricing patterns do not change, then there is a point in time where HFC fails to support cable operator business models. 

The point of overlaying FTTH for the heaviest users is that, all other things being equal, the useful life of HFC is extended, with a more-gradual shift of cable platforms to FTTH over time. 

The issue is to avoid the stranded capital problem and immediate higher capital investment implications of a jump cut to FTTH. That would be as difficult for cable operators has it has proven to be for telcos.

"Doing Good" Versus "Feeling Good" in Government Telecom Policy

It bears repeating that the test of public policy to help people hinges on whether our policies actually succeed. It is not enough to "feel good." Our policies must also "do good."

Subsidies for use of telecom services, including broadband and voice, are common in part for reasons of social equity and also because communications networks have a network effect: the network is more valuable the more people who can use the network. So programs to fund rural broadband or provide assistance to low-income households are common. 

Ignoring the risk of waste or abuse, studies also suggest the difficulty of determining how effective the programs might be. How well the programs work is a recurring issue. 

Advanced communications networks also are viewed by governments as an economic development tool. For that reason, service providers also often get subsidies. 

Whether the programs should exist is rarely, if ever, an issue. Whether the programs work is more often the problem. One recurring issue is that the programs might not achieve their goals. 

Aside from mismanagement losses (waste, fraud or abuse), there is evidence that the targeted recipients would have purchased service for other reasons. Since the major internet service providers also offer their own programs for low-income households, it is by no means certain that the government efforts add as much as we might think. 

AT&T lifeline service, depending on a potential customer’s location, offers 10 megabits per second, for $10 per month; 5 megabits per second, for $10 per month; 3 megabits per second, for $5 per month; 1.5 megabits per second, for $5 per month or 768 kilobits per second, for $5 per month.

Lifeline internet access also is sold by Verizon, CenturyLink, Comcast, Cox Communications, Charter Communications, Suddenlink, Frontier Communications and others. Generally speaking, those services sell for about $10 a month.

ISPs have reasons for connecting low-income households, irrespective of the existence of government subsidies. Customer relationships are important as they create the opportunity for lifelong buying habits, for example. Existing relationships also make it easier to sell additional products.   

The issue then is whether funds supporting demand might be better spent increasing supply, especially of broadband capabilities rather than voice. 

Lumen's FTTH Strategy is Based on its Customer Base

Lumen Technologies (formerly CenturyLink) has unusual constraints on its deployment of optical fiber access facilities. It has the most-rural serving areas of any of the major telco fixed network providers. In a sense, Lumen is similar to Charter Communications, the second-largest cable company. Charter also has a largely-rural customer base. 

Lumen also is an amalgam of a global capacity business with a largely-rural customer base, serving only a relative handful of tier-two U.S. metro areas such as Seattle, Portland, Denver, Salt Lake City, Omaha and Phoenix, for example. But most of Lumen’s revenue, and arguably most of its profit, come from the global enterprise business. 

source: Denver Business Journal 

Lumen makes about 72 percent of total revenue from enterprise customers, including its wholesale capacity customers, and about 28 percent of total revenue from mass markets, which include consumers and small businesses. Small business accounts for about three percent of revenue. 

Born of a merger between Qwest, the least dense of all the former Regional Bell Operating Companies, with CenturyLink in 2011, the combination created a firm with a significant rural and low-density service territory spread across 37 U.S. states, with a very-different global capacity business. 

That profile explains the Lumen Technology strategy and capital investment profile. Simply put, Lumen’s consumer business consists of rural and small town markets that are high cost, but produce relatively little revenue. 

Nor is Lumen exempt from the challenges other fixed network operators face from cable competition, which limit its ability to deploy optical access facilities and still make an adequate profit. 

All that means Lumen is rather more challenged than firms such as Verizon, with a mostly-dense territory. AT&T has a mix of rural and lower-density serving areas, plus some tier-one metro areas. 

Those realities shape the expected cost and return profiles those firms can expect from FTTH investments, especially when AT&T and Verizon also might use wireless access as an alternative. 

Lumen’s growth strategy relies on edge cloud infrastructure, fiber services for enterprises and gigabit-enabled consumer customers, according to Jeff Storey, Lumen Technologies CEO. That means micro-targeting areas where demand for gigabit services is strongest and where an adequate financial return can be earned as well. 

The corollary is that Lumen does not believe its best use of access network capital for broadband access is in a relatively smaller subset of total consumer access locations. As Lumen reports, of $1.4 billion in total revenue in the fourth quarter of 2020, about eight percent came from federal subsidies for high-cost rural areas. 

Lumen in fact made a decision not to accept most such funds in 2022. “Our subsidy revenue will step down from about $500 million a year to roughly $26 million in 2022,” said Neel Dev, Lumen CFO. 

If Lumen spends roughly $300 million of its own capital, in addition to $500 million of subsidy funds, it gives you some idea of the cost of building rural broadband facilities. Over a three-year period, Lumen added 1.1 million new housing units. 

That suggests $800 million of capital adds 330,000 new passed homes, or roughly a cost of $2424 per location. Other recipients might spend as much as $5,000 per location. 

Those subsidies help defray the cost of rural service, and also suggest the relatively-small expected returns from expanding rural broadband, in Lumen’s view. Lumen’s average revenue for a fiber-to-home connection is $56 a month, while the average take rate in any area where FTTH is available is just 28 percent. In other words, about 72 percent of the FTTH investment is stranded, generating no incremental revenue. 

FTTH-served homes are about 15 percent of the consumer footprint. 

source: Lumen Technologies 

The point is that the clear strategy is to harvest revenues from the consumer access business, with targeting FTTH upgrades for gigabit service in some neighborhoods. 

Most of the enterprise or global capacity assets were contributed by Qwest, while most of the then CenturyTel customers were rural consumer or smaller business accounts. 

The combined firm had at that point about five million broadband (more likely 12 million), 17 million voice and  1.4 million video accounts, as well as 0.85 million wireless units, according to one news report that appears to have undercounted broadband accounts. 

At the time of the merger, CenturyLink had about 6.9 million voice lines and 2.3 million broadband accounts in service. Qwest reported about 9.7 million voice lines and 2.85 million broadband lines in service.  

Today, Lumen makes the bulk of its revenue--about 72 percent of total--from enterprise and wholesale customers. 

source: Lumen Technologies 

About 25 percent of revenue comes from consumer services, while about three percent of total comes from small business, now known--as most large telcos report--mass market. 

source: Lumen Technologies

25 Gbps PON for Access Networks

Though business cases sometimes lag commercial optical fiber access platforms, bandwidth demand always increases over time, leading to more-affordable upgrades of optical access platforms. Deployment first is commercially viable for business or backhaul use cases in the local loop, and that should be the case for 25G PON as well.

Watch for a Marked Acceleration of Gigabit Home Broadband Subscriptions in 2021

When will gigabit home broadband hit an inflection point? Probably in 2021. The inflection point is important, as it has in the past been the point at which slow or low adoption of a product accelerates, growing at a faster clip. 

Gigabit home broadband, on the other hand, might be nearing an inflection point. Important consumer technologies tend to hit an inflection point at about 10 percent adoption. And Openvault data suggests gigabit home broadband reached 8.5 percent adoption at the end of 2020. 

That means gigabit accounts will hit 10 percent of the home broadband installed base in 2021. And if the pattern holds, that means the adoption rate will shift to a higher gear, growing much more rapidly than we have seen over the last five to 10 years.

The reason 10 percent seems to be the trigger, one might argue,  is that it is the point where early adopters have become customers and users, setting the stage for behavior to extend to the majority of consumers. 

source: Engineering.com 

When will U.S. 5G hit a subscriber inflection point? Not this year.

In January 2021, 5G coverage reached 75 percent of potential U.S. users, albeit mostly using low-band spectrum, so performance improvement is slight. Coverage refers to availability, not subscriptions or usage. By July 2021, 80 percent  of the U.S. population is expected to have 5G coverage, says PwC. 

PwC forecasts that 12 percent of mobile devices in use by U.S. customers in July 2021 will be 5G enabled. That might or might not mean all those devices are used on the 5G network, however. 

Possibly for that reason, PwC suggests the 5G inflection point for adoption will happen later, in 2023.

One can see an example in cell phone adoption by U.S. households. About 1994, household adoption reached 10 percent or so, after a longer period of slow adoption. An analogous pattern happened with smartphone adoption as well. 

 

source: Our World in Data 

The adoption pattern perhaps is easier to visualize with a longer time frame. Here is a chart showing cell phone adoption in the United Kingdom.

source: Our World in Data

A wide range of physical products have shown the same pattern. Automobile adoption shows adoption accelerating once the 10-percent threshold was hit. 

source: Our World in Data