Digital Transformation is More than Data, but Builds on It

Digital transformation is much more than digitizing or relying on data, but the ability to harness data arguably is a requirement for DT. 

In surveying 4,036 data decision-makers, Forrester researchers found 55 percent of respondents struggling to meet their digital transformation goals. Some 15 percent of data strategy decision-makers say they have already realized their DT goals. 

Data decision-makers have already increased their investment in DT over the past three years by 77 percent and plan to increase their investment by a further 57 percent over the next three years, Forrester says. 

Three-quarters of data strategy decision-makers have seen the volume of data their firm generates increase over the past three years. Some 56 percent have also seen an increase in the amount of data they collect. 

source: Dell Technologies 

User Experienced Speeds are Slower than Delivered Speeds

Data from Speedtest Intelligence shows that 17 percent of U.S. counties with sufficient samples did not meet the minimum median speeds for the current FCC definition of broadband (25 Mbps download, 3 Mbps upload) in the second quarter of 2021, Ookla says. As often is the case, the data must be interpreted.

Those figures are based on end user speed tests, in most cases conducted on devices that are Wi-Fi connected. 

So one caveat is that the samples are not random. How many of us routinely test our access speeds when they are not a problem? Almost by definition, speed tests are conducted when there is a perceived problem. Also, most of those tests happen on Wi-Fi connections that are far slower than the actual speeds delivered to the router. 

Wi-Fi speeds can often be an order of magnitude slower than the wireline delivered speed, for all sorts of reasons. 

On this map, areas shown in dark blue do not meet the downstream minimum of 25 Mbps. The green areas show issues with upload speeds. Those areas are mostly rural. 

Aside from the “Wi-Fi speed, not delivered speed” issue, keep in mind that 86 percent of the U.S. land surface has home density less than 15 homes per plant mile.  

source: Ookla 

Most people in the United States live on just six percent of the U.S. land surface, according to the USDA. About 94 percent is unsettled or lightly populated, including mountains, rangeland, cropland and forests. 

That means people or locations unable to “buy broadband” are fewer than geographic coverage would seem to indicate. Networks serving most of the people can be built on a single-digit percentage of areas. 

But that still leaves huge amounts of space where networks are expensive. 

Some 92 percent of counties with sufficient samples were not operating at a minimum 100 Mbps standard in the second quarter of 2021, Ookla also says. 

What cannot be ascertained from the Ookla data is the actual speed delivered by internet access providers to the router. What we appear to be measuring is device experienced speed using Wi-Fi. Distance from the router; in-home obstructions; interfering devices operating; age of the router or devices all can reduce experienced speeds.

Has FTTH Business Case Changed for AT&T?

As difficult as the fiber to home business model has been for firms such as AT&T, some positive changes to the business model have occurred. First, take rates seem to have increased. 

Where AT&T has been deploying its new FTTH facilities, it is seeing that almost 80 percent of the net additional accounts were not AT&T customers prior to the deployment, according to John Stankey, AT&T CEO. So AT&T is capable of taking market share from cable companies. 

In past years, AT&T and Verizon, for example, might have been doing well to get to about 40 percent overall take rates, over several years of marketing, and most were likely upgrades of existing customer accounts. 

Since cable share of the installed base is about 70 percent in most markets, AT&T has room to grow if it can take share. 

It is conceivable that the value is not just gigabit speeds, but more upstream speed, compared to cable hybrid fiber coax offerings, which support gigabit downstream speeds as well, but are more limited in return bandwidth. 

But deployment efficiencies also have been reaped, and it may be possible to do more, once the neighborhood-by-neighborhood FTTH gigabit networks have been built. There are marketing economies and physical plant economies that would allow metro-wide marketing, for example. 

That changes the consumer fixed networks business into a growth opportunity that AT&T previously had not deemed so feasible. Right now AT&T believes the current business model works for about another 30 million U.S. homes. Any subsidies would grow that number. 

Right now, the new FTTH builds produce profit margins “in the mid- to upper teens,” said Stankey. While that is not the 40-percent range that once was feasible in many parts of the access business, that figure is notable because it is not a negative number. 

“I'm not going to be happy until we have a 50-50 share split in places where there's two capable broadband providers,” Stankey says. That means a split of the market with cable operators, where today cable has about 70 percent share of the installed base. 

Today, “we've driven to 40 percent penetration levels to basically be the threshold for us to get to warrant an investment,” said Stankey. 

If a new infrastructure bill passes, that could well result in subsidies for building new FTTH plant that favorably affect the business model for AT&T and others.

Mid-Band Will Change 5G User Experience

Mid-band spectrum powers 5G in most countries globally. The relative lack of deployed mid-band spectrum in the U.S. market explains the slower speeds we tend to see for 5G services in most areas. The difference so far has been millimeter wave spectrum deployed by Verizon and AT&T. 

source: Opensignal 

The shift from low-band spectrum to mid-band spectrum for 5G coverage will make a huge difference in user experience. Simply put, low-band is for coverage, not speed. Millimeter wave is best for capacity, but not coverage. Mid-band is the best blend of coverage and capacity. 

source: Opensignal

Despite Assertions, U.S. Broadband is Neither Slow Nor Expensive

One often hears it argued that U.S. broadband is expensive or slow. That might not actually be the case, as data published by the European Telecommunications Network Operators’ Association suggests. 

Simply put, the ETNO analysis suggests U.S. downstream speeds actually are higher than in South Korea, Japan, Europe or the global average. 

Comparing prices, some point to costs that are not indexed for currency values. Looking at spending as a percentage of gross domestic product or household spending over the last decade or so, U.S. prices have dropped since 2010, as have prices in South Korea, Japan and Europe. 

source: ETNO 

The universal trend in those regions--and throughout the world--is lower prices. 

source: ETNO 

There are lots of nuances. For example, “fiber to the home” does not equate to “gigabit speeds.” In South Korea, acknowledged to be a world leader in broadband access, “next generation access” is close to 100 percent. But “fiber to home” or “premises” is at about 40 percent. 

So the issue might not be “access media” but rather “capabilities.”

source: ETNO 

That is clear in the analysis of gigabit capable or “upgradeable” networks. In the U.S. market, cable operators lead the gigabit market. 

Also, not all FTTH networks actually are upgradeable to gigabit service levels without substantial rework. In South Korea and Japan, most FTTH networks are gigabit capable or upgradeable. In Europe, about a quarter of FTTH networks are gigabit capable or upgradeable. 

source: ETNO 

Also, average downstream speeds in the United States are faster than in South Korea, Japan, Europe, or the global average. 

source: ETNO 

The point is that the repeated assertion that U.S. broadband speeds are low, or that internet access is expensive, does not hold up, either internally over time, or in comparison to trends in other developed nations. Globally, internet access is getting better, fast.  

Adjusting for purchasing power, U.S. internet access was deemed “among the most affordable in the world” by the International Telecommunications Union. 

Also adjusting for purchasing power, using the purchasing power parity method, internet access prices are around $35 to $40 a month. IIn developed nations  prices are less than $30 a month.  

Internet access in the developed world--including the United States--simply is not that expensive.

In Defense of Connectivity Provider Video Services

There is a simple reason why connectivity providers globally have invested in linear and streaming video content services: large markets; significant revenue upside; higher profit margins and cash flow implications. 

There actually are very few consumer connectivity products with near-universal appeal: mobile phone service; internet access; voice services and messaging and entertainment. Add in gaming or music and you have a list of the apps and services that drive nearly all the available revenue for a connectivity provider. 

Also, video entertainment has growth rates up to four times that of connectivity services. Where the global telecom industry grows revenues about one percent a year, entertainment grows at about a five-percent compound annual rate. 

source: PwC 

In some markets, growth is even greater. In India the growth rate has been greater than 10 percent per year for entertainment and media, for example. 

source: PwC 

The other angle is that media consumption brings the potential for additional revenue from advertising. 

source: PwC 

Criticism of telco investments in media and content often draw derision. Invest instead in the core networks and services, it is argued. Sometimes that makes sense. But not always, and not always strategically, if one believes growth will remain at the one-percent-per-year level. 

Odds are better in markets where core connectivity revenue arguably does grow closer to five percent per year, and where there is much unserved demand. 

It is not always appreciated, but revenue growth in media and advertising is virtually always greater than for core telecom services. Also, entertainment is among the biggest connectivity-related services a network can sell. 

Aside from entertainment, voice, mobility and internet access, there are few other apps or services nearly every customer might buy from a communications service provider.

S&P 500 Longevity Mirrors Connectivity Provider Revenue Pattern

What is true of connectivity provider revenue also is true of firms. My general rule of thumb is that service providers must replace half of all present revenue every 10 years. As it turns out, about half of all Standard & Poors 500 companies are replaced every decade. 

The typical S&P 500 firm remains on the index less than 20 years, and is predicted to drop to about 14 years by 2026, says Innosight. 

Shrinking lifespans are in part driven by a complex combination of technology shifts and economic shocks. “But frequently, companies miss opportunities to adapt or take advantage of change,” Innosight says. 

“For example, they continue to apply existing business models to new markets, fail to respond to disruptive competitors in low-profit segments, or fail to adequately envision and invest in new growth areas, which in some cases can take a decade to pay off,” Innosight notes. 

The point is that “no business survives over the long-term without reinventing itself,” Innosight says. That seems also true of connectivity firms. 

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. 

But some seem to have unrealistically high hopes for 5G.  

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.

Whether at the firm level or the product level, change is a constant. Half of what revenue drives a connectivity business in a decade does not yet exist, or is not yet tangible. Up to half of the product drivers of that revenue do not exist or have not yet been mass deployed.