How Big--or Small--Is Service Provider Network Slicing Market?

Among possible new revenue sources created by 5G, network slicing is expected to support advanced connectivity use cases for enterprises and governments that are primarily, though not exclusively, driven by untethered end points. 

Most observers now believe 5G revenue growth will be disproportionately driven by new use cases and value for enterprise, business and government. 

In large part, that is because businesses are expected to be the buyers of edge computing, network slicing and internet of things sensor applications. 

That noted, consumer revenues in Europe, for example, are stable at about 68 percent of total revenue (mobile and fixed). In some markets, business revenues could range from 30 percent to 40 percent of total. Smaller providers might generate only about 15 percent of total revenue from business segments. 

The issue is how much additional 5G revenue lift might be possible, from network slicing, for example. Some believe the connectivity portion of the market is fairly small, despite the hype. 

How small? Less than $1 billion globally by 2026. That is hardly a “market” at all, by global telecom standards. That noted, value sometimes is monetized in other ways, such as higher new account rates, lower churn, higher gross revenue, lower capex, lower opex or some combination of those benefits. 

source: GM Insights 

A network slice is a virtual network created through a 5G core network able to maintain private network features all the way to the end point. In principle, a network slice should be easier and faster to create and tear down, with advantages for temporary networks or use cases including disaster recovery, large events or other instances where unexpected--but temporary--demand emerges.  

 source: Nokia

Mobile gaming is one consumer use case while internet of things applications are the best examples of enterprise or government use cases.

Network slicing allows creation of virtual networks whose characteristics (bandwidth, speed, latency, reliability, and security) can be optimized. Network slicing offers a way to create virtual networks with performance characteristics optimized for lead applications. 

Mobile gaming using virtual reality or artificial reality might benefit from latency and bandwidth assurances. Other use cases in the financial industry might benefit from enhanced security and network availability guarantees. 

In the fleet management industry, different core functions might benefit from use of distinct network slices. Low latency and ultra-reliable performance might be best for  traffic notification, where infotainment requires higher bandwidth but less need for low latency or robustness. 

It is conceivable network slicing protects core transport bandwidth for fixed wireless operations, since fixed wireless peak bandwidth usage might be an order of magnitude higher than typical mobile data requirements. 

Quality of service also has been a driver of product pricing differentiation. Business services with QoS guarantees, support services reaction times and financial advantages for customers if the policies are violated, have been a staple of communications product pricing for decades. 

The ability to support 5G network slicing in the core network, all the way to the mobile edge, is supposed to create new product capabilities, such as networks optimized for particular parameters. 

Ultra-low latency performance; bandwidth guarantees, security or performance predictability will be touted as values of network slicing, a new way of creating virtual private networks. 

Network slicing value for retail customers, though, will have to be proven. One might argue that edge computing is a functional substitute for many network slicing use cases, for example. 

It would be fair to note that connectivity providers often have developed and offered  many features and services they  believed customers would want. The catch is that revenue for connectivity providers is the cost for enterprises, businesses and consumers who are asked to buy and use the features and services. 

If ultra-low-latency applications are those which could benefit from network slices, one alternative is to do commuting at the edge, and not sending data across wide area networks that are optimized for low latency. In other words, edge computing might often be a functional substitute for network slicing.  

In many use cases, the value of ultra-low-latency computing is supplied by edge computing services, with non-real time backup across wide area networks. 

Perhaps ironically, consumer customers who have few other alternatives might be good candidates for internet access with quality of service features a network slice offered by a connectivity provider, providing governments deem this lawful. Network neutrality rules often var the offering of consumer services with quality of service guarantees, for example. 

Gaming services, work-from-home conferencing and ultra-high-definition video are among potential consumer use cases for network slicing, where lawful.

How Much Share Can Telcos Claim as They Step Up FTTH Investments?

U.S. cable operators have taken market share in consumer broadband for most of the last two decades. But some analysts believe a new wave of investment in fiber to home facilities will allow telcos to claw back significant amounts of installed base. 

Long term, MoffettNathanson sees cable having a 50 percent broadband market share in markets in which they compete with fiber-to-home facilities. That implies a shift of 20 percent of the installed base from current levels. 

Not all observers agree with that analysis. S&P Global Market Intelligence, for example, does not expect stepped-up telco FTTH investment to change share statistics very much. 

But S&P Global Market Intelligence does believe new competition from mobility suppliers using fixed wireless (T-Mobile, for example) will gain about six percent share of the aU.S. residential broadband market with about 7.19 million subscribers. 

It is not yet clear how much of that share gain will be claimed by upstarts in the home broadband market such as T-Mobile, and how much will be gotten by fixed wireless operations conducted by incumbents such as AT&T and Verizon. 

The former gains will represent market share gains by telcos, but perhaps some losses for AT&T and Verizon. The latter could increase the installed base held by AT&T and Verizon. 

Also, some of that share will be gained by independent wireless internet service providers. 

S&P Global Market Intelligence also estimates there will be about 1.52 million satellite customers by the end of 2021, accounting for just one percent of the installed base of home broadband accounts. 

Today, cable operators get as much as 85 percent market share when facing telcos using VDSL and 95 percent market share competing against telco DSL facilities, the firm says. Where cable companies compete against telco FTTH, the big telcos have gotten somewhere in the range of 40 percent or slightly-higher share of the installed base. Some smaller telcos manage to get 50 percent of the installed base.  

In the first quarter of 2021, the largest U.S. telcos had about 31 percent share of the installed base and got about eight percent market share of net new accounts, according to Leichtman Research. 

Mobile market share gains could also be an issue. T-Mobile, for example, expects to gain home broadband share, especially in rural areas, at the same time it gains mobile account share. 

Some 15 percent of U.S. adults are mobile only for home broadband, says Pew Research.  The point is that telco FTTH competes against cable, other mobile companies, independent ISPs and satellite. 

And stranded assets and financial return remain issues for telcos investing in new FTTH facilities. As voice and video entertainment revenue streams have dwindled, the business case for home broadband using FTTH increasingly relies on internet access as the main revenue driver for the FTTH business case. 

That is why some see fixed wireless as important. It might be the only way for telcos to compete against cable and other competitors in many geographies. 

Always a difficult business decision, the economics arguably have become worse as voice and entertainment revenues dwindle, increasingly making FTTH viable in some urban or suburban locations, not all. Rural deployments rely on subsidies. 

Rural customers represent about 40 percent of the entire mobile services marketplace, including 54 million households and about 140 million people, according to T-Mobile. Historically, T-Mobile has been underrepresented in rural markets, compared to AT&T and Verizon.

U.S. Gigabit Home Broadband Nears Inflection Point

About 9.6 percent of U.S. home broadband accounts now buy service at 1 Gbps, says Openvault. That is important because, historically, successful consumer products hit an adoption inflection point at about 10 percent adoption rates. In the colloquial, what happens is that “you buy because your neighbor has it.”

source: Openvault 

To the extent that gigabit internet access can be considered a discrete product, a shift in buying to gigabit speeds by a growing percentage of customers also will shift the rest of the market toward higher speeds. 

The inflection point around 10 percent adoption fits with the classic “S curve” of business or product evolution as well. 

source 

It is worth noting that not every innovation succeeds. Perhaps most innovations and products aimed at consumers fail, in which case there is no S curve, only a decline curve. 

source: Thoughtworks 

The consumer product adoption curve and the S curve also are related to the point at which early adopters are buyers, but before the mass market adoption starts. 

source: Advisor Perspectives

SMBs Boost Managed Service, Cloud Services Use During Pandemic

To nobody's present surprise, small and mid-sized businesses in the United States, United Kingdom, Canada and Australia made significant moves to adopt cloud-based remote work technology and managed services during the Covid-19 pandemic, Analysys Mason says. Many survey respondents suggest they will continue to use those new managed services once the pandemic is over, in large part because many expected higher levels of work from home on a permanent basis.

source: Analysys Mason 

Use of new collaboration solutions is the notable feature of SMB response, though new users of cloud technology of various types or managed services also seemed to grow up to 10 percent. 

source: Analysys Mason 

At least in the first quarter of 2021, most respondents expected they would continue using those new managed services after the pandemic ends, in large part because a greater volume of work from home is expected, compared to pre-pandemic levels. 

source: Analysys Mason

Analysys Mason surveyed 1870 small and medium-sized businesses (SMBs) in Australia, Canada, the UK and the USA between December 2020 and February 2021, about their business and technology responses to the Covid-19 pandemic.

As you would expect, given widespread economic lockdowns, revenue declined for 55 percent of “small” businesses (up to 99 employees) and 38 percent of mid-sized businesses (100 to 999 employees).

The finance, insurance and real estate industries; healthcare and professional services sectors fared best in terms of revenue “normalcy.” Firms in retail; wholesale; other business services and hospitality reported the most significant losses, Analysys Mason says. 

source: Analysys Mason 

Global Bandwidth Demand Generated by a Relative Handful of Data Centers

Some might recall a time when international capacity existed mostly to transport voice calls. In 1980, for example, tier-one telcos were the owners of the transmission assets and trans-Atlantic capacity could easily be measured in kilobits per second up to 1.5 megabits per second. 

These days, capacity on global routes is measured in terabytes. In 1980, most of the demand was generated by people making long distance calls. Today, internet apps and video drive most of the global demand for capacity.

source: AI Trends 

A small handful of firms--Google, Facebook, Amazon, and Microsoft—drive most of the demand for international capacity. In 2020, those four firms accounted for 66 percent of all used international capacity. So content services and applications now drive demand for global bandwidth.

About 45 percent of such hyperscale data centers are located in the United States, about eight percent in China, seven percent in Japan, for example. 

source: Synergy Research

Beyond that, the owners of facilities are mostly a handful of content and application providers, not telcos or connectivity service providers. 

Annual demand still grows close to 50 percent, especially on routes connecting Africa and Asia. On other routes, annual growth ranges between 30 percent and 40 percent, according to Telegeography. 

source: Telegeography 

One might think most of that capacity is used to deliver content and data to end users of the internet. Actually, most of the bandwidth connects hyperscale data centers operated by the largest app firms. 

source: Vox.com, Cisco 

source: Cisco 

Among many other changes to the global telecom business caused by a shift to internet, mobile and cloud communications, global bandwidth patterns have changed. In the past, long haul traffic originated and terminated at central offices. 

Now, with the dominance of mobile-consumed content and apps, using the internet, cloud computing and web browsers or apps, traffic originates and terminates heavily at hyperscale data centers.

source: Cisco

Asia-Pacific has been the fastest growing region in terms of hyperscale data center location and will continue to grow more rapidly over the next five years, although North America accounted for 43 percent of hyperscale data centers in 2020, says Cisco.

The point is that global capacity demand has shifted dramatically: from telcos to app and content providers; from voice to internet traffic; from voice to video; from end users to data center interconnection.

Cost Certainty Has High Value for Consumers

Enticing consumers to upgrade to a next-generation network (fixed or mobile) might not be difficult for early adopters, who care less about cost than “being first” to get the new technology. Most consumers need other justifications, though. 

Some perceived problem needs to be addressed; some new value has to be added; new capabilities or use cases have to be made clear, before mainstream consumers will feel they must upgrade. 

Sometimes network performance does the trick; sometimes not. Where it is available, 5G can claim to offer faster internet access speeds. Depending on which spectrum options are available, the incremental change might be almost non-existent, slight or highly differentiated. 

Based on past experience, mobile customers know a bit of trial and error is possible or required. 

Right now, U.S. mobile operators often take a different tack. Rather than hanging the purchase decision entirely on 5G network performance or availability, they shift the value proposition to cost certainty. 

In other words, 5G is offered as a feature bundled with unlimited usage plans. But the key value is “cost certainty.” Customers know what the recurring cost will be, and need not worry about additional usage or overage charges. 

Even when an unlimited usage plan costs more, there is enough additional value in such plans to drive adoption, so valued is cost certainty. 

Predictability also is valued in terms of product consistency, others will note. That seems less the case for unlimited mobile data usage plans. What really matters is cost certainty. 

Consumers tend to prefer predictable cost services because it allows them to budget for the  recurring payments. People do not like surprises, where it comes to recurring purchase costs. 

There is considerable evidence of consumer preferences for subscription over per-use pricing. 

During the 1970s, the U.S. Bell system telephone companies started offering customers a choice between the the traditional flat rate option, which might cost $7.50 per month, and allow unlimited local calling, and of a measured rate option, which might cost $5.00 per month, allow for 50 calls at no extra charge, and then cost $0.05 per call. 

In the numerous trials that were carried out, the flat rate option was usually selected by over half of the customers who were making fewer local calls than the 50 covered by the measured rate basic charge, even though they clearly would have benefited from per-use pricing. 

These results are documented in Cosgrove and Linhart (1979), Garfinkel and Linhart (1979) and Garfinkel and Linhart (1980). 

The same sort of issue arose in the 1980s and 1990s around videocassette and DVD movie rental fees. People were charged a late fee when cassettes were returned “late.” Some argue that early Netflix, which mailed DVDs out to consumers, succeeded in part because there was no danger of late fee charges . 

In fact, the Netflix subscription model was designed to eliminate late fees.  

Similar results were seen when long-distance calling plans were similarly varied in the 1980s.Consumers could pay by use or buy flat-rate calling plans. Many customers  paid for plans that provided more calling than they actually used, as documented by Mitchell and Vogelsang (1991).

In the internet era, consumers often buy usage plans that offer more usage than they expect, simply so customers are assured of the recurring cost.

There are three main reasons that probably lead consumers to prefer flat-rate pricing, and they were recognized a long time ago in research by Cosgrave and Linhart (1979), Garfinkel and Linhart (1979) and Garfinkel and Linhart (1980).

Fixed price plans provide protection against sudden large bills. Customers also typically overestimate how much they use a service, leading them to buy plans that they actually do not need.

There is a convenience issue as well. In a per-use situation, consumers seem to worry about whether each call is worth the money it costs. That limits usage, as a study by Garfinkel Garfinkel and Linhart (1980) found.

 A flat-rate plan allows them not to worry about the cost of each call.

The point is that the reasons consumers prefer flat rate service plans are clear. They value such plans enough to pay more than they might under usage-based plans. But the cost certainty has value. 

In the case of 5G unlimited usage plans, that behavior will be clearly seen. The value might often be less the “unlimited usage” than the “certainty of cost.”

No Digital Transformation Without Computing Cost Reductions

Economist William Nordhaus has estimated that computing costs have fallen dramatically since the 1940s, improving by an order of magnitude every four years in the 1980s and 1990s, for example. You can safely argue that this vast reduction in cost underpins the shift to affordable digital transformation of all types, not to mention the broader shift from physical to digital processes. 

source: Nordhaus