Next Era of Telecom Might be Quite Different

The next era of telecommunications might be a stretch for most firms, in the sense that revenue growth might have to come from application creation and development that never have been core competencies. 

To be sure, edge computing, internet of things use cases and a few consumer use cases involving artificial reality or virtual reality seem promising. The larger point is that revenues in any of those new growth areas will not likely be enough to offset stagnating revenues in the core connectivity business. They will help, but the magnitude of new revenue growth will be staggering. 

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.

As in the past, acquisitions are the path forward, as there likely is no feasible way to organically grow that big a revenue stream so fast. 

The pattern is entertainment video and content, where firms have acquired assets, customer bases and revenue streams, rather than building them. 

That strategy will be dictated in part by the scant success telcos have had in the past with innovation. Voice communication might be considered the singular example of a sustainable application created by the industry, though no longer an application that the industry monopolizes. 

source: STL Partners 

Text messaging was almost an accidental discovery and a byproduct of Signaling System 7 adoption. Internet access is an application, but a relatively trivial app whose value is really provided by the pipes that allow the access to happen. Linear and streaming video were invented by others. 

But scale and speed are the other issues. The industry cannot wait for organic growth to grow incrementally over time, if it really needs to create $400 billion of new revenue within 10 years. So scale, within a decade, is the challenge. And that means acquisitions. 

The industry’s efforts to create business data transport were important, but often failed to achieve scale. ISDN was important for a time, and ATM enjoyed some success. But true global scale came from the developers of Ethernet and Internet Protocol, both created by the computing industry, and the derivative internet and World Wide Web. 

The contest between ATM--the telco next-generation network proposal--and IP, the computing industry proposal, was settled in favor of the computing industry’s preference. The observation simply is that telcos have not been notably successful with innovation outside the core network functions. 

But skills in those areas might well be necessary in the next era, as the connectivity industry (with the exception of Africa) might already have passed the peak of its life cycle. 

STL Partners forecasts that, apart from Africa, all regions will see a compound annual growth rate (CAGR) below three percent for both fixed and mobile services for the next three years. 

Global CAGR of less than one percent per year is the forecast, which is a negative rate of growth assuming any rate of inflation above one percent.

Verizon, T-Mobile Home Broadband Targets

Both Verizon and T-Mobile have said they will use new C-band and existing spectrum to introduce new home broadband services that compete with cable operators and other internet service providers.

By the end of 2021, Verizon expects to cover nearly 15 million homes with its home broadband product, and by the end of 2023, 30 million homes, using both 4G and 5G networks.

T-Mobile’s service presently offers speeds of about 50 Mbps for $60 a month, using the autopay feature. 

Verizon’s 5G Home internet now offers download speeds up to 1 Gbps in 18 markets, with one to two million households expected to be covered by the millimeter wave network by the end fo 2021. 

Verizon expects to expand coverage to 15 million locations with LTE Home (using 4G) and the C-band spectrum. Verizon has not yet said what it aims for, as far as speed. 

How Long to Replace All U.S. Access Copper?

We might all agree that, at some point, optical fiber will replace copper in telco access networks. What is harder to predict is when that might actually happen in the U.S. market. To be sure, FTTH facilities keep growing. But there are key financial constraints, especially related to financial return. 

Looking only at fixed network accounts, U.S. telcos have about 36 million accounts, while competitors (cable providers and independent VoIP providers) have 62 million accounts. If there are roughly 146 million household locations, telco sales of voice reach only about 25 percent of locations. So voice stranded assets are as high as 75 percent. 

Statistics for broadband market share are roughly similar, with cable operators having about 70 percent share and telcos about 30 percent share. 

That poses a major business model issue for any service providers contemplating upgrades to fiber to home. In principle, FTTH would allow telcos to compete more effectively for internet access accounts. But if copper can support the voice applications, the incremental revenue FTTH can supply will largely be limited to broadband market share gains.

It never is clear that makes financial sense, especially if other access platforms, including fixed wireless can address much of the demand. 

Fixed wireless will not appeal to all customers, for reasons of speed. Few fixed wireless networks will routinely support speeds of 600 Mbps or greater, for example. But not all customers will care about that. 

If a typical household spends $66 a month for fixed internet and between $40 and $60 a month for mobile data, we can roughly estimate the breakeven point where going all-mobile for internet access costs no more than what already is spent for mobile and fixed internet access, ignoring a bit of hassle factor for doing so.

Assume per-user mobile data costs $50 a month, while per-household fixed data costs $70 a month, and about $28 per user in each household. For a multi-user household of an average 2.5 users, that implies something like $78 per user for an all-mobile approach.

It’s a rough estimate, but that implies usage allowances currently set at about 110 GB, priced at about $80, would be competitive offers for many users, and allow substitution for fixed 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.  

All that makes the business case for replacing copper access even more challenging, as the amount of stranded assets increases if fixed wireless gets any significant traction. 

One might argue that only FTTH gives telcos a chance to change their market share positions in the consumer broadband market. But even where it is available, FTTH tends to get about 40 percent take rates. So FTTH itself faces a stranded asset issue. 

source: RVA 

Though operating cost savings will accrue, the potential upside for a telco FTTH upgrade at scale might be 10 percent market share gain in broadband. It is not clear whether that makes as much sense as supplying part of that demand using fixed wireless in the near term, and continuing the gradual replacement of copper as it deteriorates to the point where it simply must be replaced.

One might argue that will take 10 to 20 more years.

How Big is the "Small Business" Market Opportunity?

There always are two lines of thought on small business connectivity revenue potential, though perhaps less divergence in the applications area. The first line of thought is that small businesses are an underserved segment of the market specialists can tap as the bigger firms will generally ignore the segment. 

The countervailing view is that small businesses generally have buying characteristics quite similar to consumer accounts--price sensitivity and relatively low spending compared to larger businesses--for and for that reason are not so attractive. 

Much hinges on the definitions. There is a key difference between small and micro business that shapes potential opportunities for connectivity service providers and their channel partners. 

Most “small” businesses--in terms of total number--are sole proprietorships with zero employees. By some definitions, micro businesses have up to 10 employees. 

Small businesses can have as many as 100 to 250 employees. The definition of “small business” used by the U.S. Small Business Administration defines organizations of up to 1,500 employees as small, depending on the industry. 

In an Asia and Pacific Islands context, large enterprises represent one percent of total. Medium entities--defined as having between five and 250 employees--constitute perhaps 25 percent to 30 percent of total. Micro entities represent 65 percent to 75 percent of firms.  

source: ADB 

In most countries small business might represent 99.9 percent of all businesses. The point is that, depending on definition, “small” businesses are functionally consumer accounts or functionally mid-sized accounts (between 500 and 1,500 employees, for example). 

The “small business” segment might not actually exist, in other words.  

As a practical matter, there are key operational differences between micro businesses and larger businesses. The ability to  cut costs is typically negligible, as a micro business already must operate quite efficiently. Larger firms typically can gain more from cost-cutting measures. 

So yes, there could be a “small business” opportunity in many countries, if the definition used is that “small” entities have 500 to 1,500 employees.

"Middle Mile" Might be Key for Automated Trucking, Not Just ISPs

Many in the connectivity business are familiar with the concept of the “middle mile,” the distribution network connecting core wide area transport with the actual access network supporting services to end user customers. 

As a business issue, the middle mile often is a problem for internet access providers who do not own their own WAN facilities, and must buy distribution services from a third party, often in rural areas where costs are high. 

Something of the same issue exists for autonomous trucking, where the immediate application is likely to be the “middle mile long haul” between local transfer hubs. As Deloitte envisions the autonomous trucking market developing, human drivers would handle the “local loop” or “access network” chores at either end of a trip. 

source: Deloitte 

Autonomous trucks are likely to be an early application of driverless vehicles, in large part because the business case and financial returns are so clear, say consultants at Deloitte. 

The actual autonomous journey would occur only between transfer hubs where loads are transferred to driverless vehicles for movement along highways. That would simplify all the logistical and control issues a full end-to-end driverless vehicle approach would entail. 

“Self-driving trucks offer sizable economic and operational benefits for companies across the supply chain; most notable is a projected 30 percent or more per-mile cost reduction as compared to the current human driven truck model,” the consultants say. 

“Our model predicts that autonomous truck technology will likely be first commercialized in the Southwest—specifically, Texas, Arizona, and New Mexico, followed quickly by Oklahoma” for reasons of favorable regulation, weather, and road conditions, the Deloitte researchers say. 

Coverage then would begin to extend to northern and eastern locations where the initial conditions are not as favorable.

Next Normal or New Normal?

The post-Covid business environment--for connectivity providers as much as for any other industry--might be “next normal” or “new normal.” The former might indicate bigger changes for some industries but fewer disruptions for others, essentially accelerating trends already present.

The latter might indicate fairly permanent and significant life alterations that were not already in place. “Just different” is one way of describing “next normal,” while “never be the same” characterizes “new normal.”

McKinsey consultants analyzed the change potential across more than 2,000 tasks used in some 800 occupations in the eight focus countries.

“Considering only remote work that can be done without a loss of productivity, we find that about 20 to 25 percent of the work forces in advanced economies could work from home between three and five days a week,” McKinsey says. 

“This represents four to five times more remote work than before the pandemic and could prompt a large change in the geography of work, as individuals and companies shift out of large cities into suburbs and small cities,” McKinsey notes.

The geography of communications also should shift, with some possible ramifications. Pre-Covid, mobile traffic demand was generally concentrated at 30 percent of cell sites. That should lessen, with a greater percentage of traffic at the other 70 percent of sites.

That also should alleviate some capital investment intended to boost radio capacity at the busiest urban sites. Additionally, mobile data demand could grow less rapidly than before the pandemic, if significant percentages of workers stay at home, more of the time, connected to their Wi-Fi networks. 

Less urban traffic also means less demand for all the associated businesses catering to urban workers. That suggests less demand for small business connectivity, for some time, or perhaps even permanently.

Less demand for urban office space will shrink the market for business connectivity supplied to those locations. There eventually should be higher demand for at-home upstream bandwidth as well, as more people need better support for two-way video sessions. 

Use cases for fixed wireless should improve, as the suburban and rural locations more people will be working from are precisely those locations where sustainable business cases for new fiber to home installations are toughest. 

There will unpleasant social implications, as low-wage, lesser-skilled jobs are among those which will be displaced, post-Covid. As has been the case for decades, the growth will be happening in health care and knowledge work. 

source: McKinsey 

“Compared to our pre-Covid-19 estimates, we expect the largest negative impact of the pandemic to fall on workers in food service and customer sales and service roles, as well as less-skilled office support roles,” McKinsey says. 

“Jobs in warehousing and transportation may increase as a result of the growth in e-commerce and the delivery economy, but those increases are unlikely to offset the disruption of many low-wage jobs,” McKinsey adds. 

“In the United States, for instance, customer service and food service jobs could fall by 4.3 million, while transportation jobs could grow by nearly 800,000,” McKinsey notes. “Demand for workers in the healthcare and STEM occupations may grow more than before the pandemic.”

On the other hand, it also is fair to ask whether travel, hospitality and some forms of business travel will be permanently depressed. A year ago, some quipped that “trade shows are dead,” as a permanent trend. To be sure, all large in-person events were temporarily halted, for health reasons. 

But we need to be careful about extrapolating present circumstances into the future. The pandemic will pass. And we can be sure that any linear extrapolation from pandemic behaviors will prove incorrect. 

Gradually, demand for experiences provided by in-person events will return. For business-to-business sales operations, they will be almost necessary. 

“We found that some work that technically can be done remotely is best done in person,” McKinsey says. “Negotiations, critical business decisions, brainstorming sessions, providing sensitive feedback, and onboarding new employees are examples of activities that may lose some effectiveness when done remotely.”

U.S. Telcos Add Internet Access Accounts in 2020, First Gain Since 2014

U.S. fixed network telcos gained less than one percent of the net internet access account additions in 2020, which might seem paltry, but at least was not a net loss, as has been the case so often over the past 20 years. Cable ISPs gained more than 99 percent of the net new accounts in 2020. 

In 2019 the top telcos lost more than half a million accounts. In fact, the annual net gain, though small, was the first gain since 2014. 

Cable Companies	Subscribers, end 2020	Net Additions 2020
Comcast	30,600,000	1,971,000
Charter	28,879,000	2,215,000
Cox*	5,380,000	210,000
Altice**	4,359,200	142,200
Mediacom	1,438,000	110,000
Cable One**	857,000	101,000
WOW (WideOpenWest)	813,800	32,300
Atlantic Broadband	504,621	37,871
Cable Total	72,831,621	4,819,371

Telcos	Subs, end 2020	Net Additions 2020
AT&T	15,384,000	(5,000)
Verizon	7,129,000	173,000
CenturyLink/Lumen	4,544,000	(134,000)
Frontier^	3,100,000	(111,000)
Windstream	1,109,300	60,000
Consolidated	792,200	8,035
TDS	493,300	38,100
Cincinnati Bell	436,100	10,400
Total Telco	32,987,900	39,535
Total ISP	105,819,521	4,858,906

source: Leichtman Research Group 

At the end of 2020, U.S. cable ISPs held 69 percent of the installed base, telcos about 31 percent.