Half of U.S. Households Buy Internet Access Running between 100 Mbps and 200 Mbps

“Average” tends to be misleading for most things related to use of the internet, especially when using the arithmetic average (mean) rather than median approaches. In the fourth quarter of 2020, for example, mean data consumption by U.S. households was about 483 gigabytes, while median consumption was 294 GB (half higher, half lower). 

source: Openvault

The significant difference is “power user” data consumption. About two percent of users consume more than 2 terabytes of data per month, while 15 percent consume at least 1 TB per month. That skews the (mean) average consumption. 

 

source: Openvault

The Covid-19 work from home and stay at home policies caused an immediate spike in consumer fixed network data consumption, which has persisted at new and higher levels. 

source: Openvault

source: Openvault

Perhaps one way to describe consumer behavior is to note that half of U.S. households (51 percent) purchase service plans offering 100 Mbps to 200 Mbps downstream speeds. Less than a quarter buys speeds slower than 75 Mbps, while 30 percent or so buy plans running faster than 200 Mbps.

If Telco Platforms are Created, Acquisition is Likely the Driver

If any telcos are successful at becoming platforms, acquisition is likely to be the path forward. 

Some observers now believe that about 70 percent of new value created through “digitalization” over the next decade will be based on platform-enabled, ecosystem-based business models, according to the World Economic Forum. 

That should raise questions about how much of that economic activity can be captured by telcos that mostly operate in non-platform markets. Basically, telecom is a “pipe” business, not only related to common parlance about selling connections, but also because of the “direct to customer” sales model. 

Telecom is not the only business or industry where debates about business strategy include the issue of “pipes versus platforms.” In fact, almost all businesses use a “pipe” model: they source and create products sold to customers. Firms create products, push them out through various distribution systems for sale to customers. Value is produced upstream and consumed downstream. 

Virtually all consumer goods use a pipe model, as does manufacturing, media, most software products and education. 

Platforms are different. Unlike pipes, platforms do not just create products and sell them. Platforms allow users to create and consume value as well. When external developers can extend platform functionality using application platform interfaces, that usually suggests a platform model could exist. 

Another way of stating matters is that, on a platform, users (producers) can create value on the platform for other users (consumers) to consume. Think of YouTube, Wikipedia, Amazon, Uber or Lyft. 

The business implications can be profound. Some attribute Apple’s rise to prominence in the phone industry not on its design, its user interface or operating system features but to its creation of an ecosystem and platform. 

In fact, the ability to generate revenue from acting as an intermediary or marketplace for different sets of market participants is the functional definition of whether some entity is a platform, or not. 

So any telco aspiring to become a platform must necessarily become an enabler of value creation, not the provider of a “pipe” product. It is almost inconceivable that any firm could do so without making a huge acquisition. 

Failing that, providers might hope to replace some lost revenue with new products, with a goal of harvesting revenue as long as possible. If profits remain elusive, then massive industry consolidation could happen, as connectivity networks become--once again--monopoly providers highly regulated by governments. 

Half of Tech Workers Say Work Hours Increased during WFH, Blind Reports

Nearly half of respondents to a Blind poll of technology industry workers said their work hours had increased during the enforced “work from home” policies put into place because of Covid-19. About 10 percent of respondents say their work hours have decreased.

If you quantify “productivity” as output compared to input, and if the output remains the same, while hours worked increase, productivity arguably has dropped. There is some evidence that productivity has not changed. 

There is some evidence that workers believe they are just as productive, or more productive. A survey of 365 U.S. workers by The Manifest found that 30 percent of respondents think they are more productive working from home. 

Fully 45 percent believe they are more productive working in an office, and 24 percent say they’re equally productive working from home and in an office. Keep in mind those are examples of what people think about their productivity. It is not an actual measure of whether they are, or are not, more productive in home or office settings. 

source: Agility PR 

Some have argued that even if productivity can be sustained for a brief period, it might well not sustain itself over the long term. A survey of the heads of nearly 50 U.S. businesses employing 443,895 people in industries that include technology, legal services, advertising and the finance, insurance and real estate sector found that 40 percent of them have started to see decreases in productivity as staff work remotely. 

J.P. Morgan also seems concerned that WFH productivity is slipping, while others note growing evidence of mental health issues caused by enforced WFH. 

At least, that might be true for the 25 percent of workers who can work from home.  

Also, there is a growing sense among professionals that WFH is hurting their career progression. Others might point out that WFH has positives and negatives, not including burn out or work-life balance, even if WFH once was viewed as a perk. 

One might think less commuting time “has to improve productivity.”

Reviewing time-use diaries of 1,300 U.S.-based knowledge workers, collected in the summers of 2019 and 2020, professors Andrew Kun, Raffaella Sadun, Orit Shaer, and Thomaz Teodorovicz found a reduction in commuting time to work of about 41 minutes, on average, because of extensive work-from-home rules. 

Intuitively, you might guess that has led to an increase of productivity. The study is far more nuanced. 

“Independent employees (i.e., those without managerial responsibilities) reallocated much of it to personal activities, whereas managers just worked longer hours and spent more time in meetings,” the researchers note. 

Independent contractors simply used the extra free time for non-work activities. Managers had to spend more time in meetings. 

“For managers, the increase in work hours more than offset the loss in commuting time: Their work day increased on average by 56 minutes, and the time they spent replying to emails increased by 13 minutes,” the researchers say.

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.