Regulators Cannot Keep Up with Pace of Change in Computing and Communications

It often has been said that regulators cannot keep up with the pace of change in computing, broadband and applications. That has proven to be true for regulators looking at home broadband performance. 

About 2010 or so Ofcom, the U.K. regulator laid out a national goal for “superfast” internet access of about 30 Mbps, at a time when the typical speed most consumers were able to use was about 6 Mbps.

Average actual U.K. fixed-line residential broadband speeds grew from about 3,6 Mbps in 2008 to about 15 Mbps in 2013. 

source: Ofcom 

In 2011, Ofcom warned of low interest in 50-Mbps services, for example. 

Ofcom also worried about low interest in 30 Mbps services as well. 

That same year, a 50-Mbps internet access connection (home broadband) cost close to $100 a month. 

The next formal goal will be gigabit per second access, which shows you just how fast improvements are coming in the home broadband business. 

That same degree of improvement was seen in the U.S. market as well. Back in 2010 average U.S. home broadband speeds were about 5 Mbps. By 2019 speeds had climbed to about 33 Mbps. 

U.S. median home broadband speeds were about 131 Mbps in October 2021.  

source: Nielsen Norman Group 

By 2050 the home broadband headline speeds are likely to be in terabits per second. Though the average or typical consumer does not buy the “fastest possible” tier of service, the steady growth of headline tier speed since the time of dial-up access is quite linear. 

And the growth trend--50 percent per year speed increases--known as Nielsen’s Law--has operated since the days of dial-up internet access. Even if the “typical” consumer buys speeds an order of magnitude less than the headline speed, that still suggests the typical consumer--at a time when the fastest-possible speed is 100 Gbps to 1,000 Gbps--still will be buying service operating at speeds not less than 1 Gbps to 10 Gbps. 

Though typical internet access speeds in Europe and other regions at the moment are not yet routinely in the 300-Mbps range, gigabit per second speeds eventually will be the norm, globally, as crazy as that might seem, by perhaps 2050. 

The reason is simply that the historical growth of retail internet bandwidth suggests that will happen. Over any decade period, internet speeds have grown 57 times. Since 2050 is three decades off, headline speeds of tens to hundreds of terabits per second are easy to predict. 

source: FuturistSpeaker 

Some will argue that Nielsen’s Law cannot continue indefinitely, as most would agree Moore’s Law cannot continue unchanged, either. Even with some significant tapering of the rate of progress, the point is that headline speeds in the hundreds of gigabits per second still are feasible by 2050. And if the typical buyer still prefers services an order of magnitude less fast, that still indicates typical speeds of 10 Gbps 30 Gbps or so. 

Speeds of a gigabit per second might be the “economy” tier as early as 2030, when headline speed might be 100 Gbps and the typical consumer buys a 10-Gbps service. 

source: Nielsen Norman Group 

How Far Can "Asset Light" Model Go?

In addition to network virtualization, private equity and institutional investor interest in communications infrastructure might be part of a reconceptualization of where value lies in the connectivity business, from the standpoint of service providers. 

For investors, fiber assets, for example, represent an alternative asset similar to airports, seaports or other physical infrastructure. For service providers, there are new ways to conceive of where sustainable business advantage can be gained. 

As the competitive era of telecommunications dawned, service providers gradually moved away from developing and creating their own platforms, from switches and access media to applications. They almost universally now rely on third parties for infrastructure. 

So the issue is how far the trend can extend. 

As mobile operators have concluded that owning tower assets does not provide as much value as other uses for cash, if such assets are sold, so there could be new thinking about the value of copper access assets and access networks generally.

Specifically, service providers might decide that, though still valuable, access assets need not be 100-percent owned. Partial ownership might still provide the required business value, but at less overall capital investment. Freed up capital from asset sales might then be applied to other more-strategic growth initiatives. 

That is not to say there is a general rethinking of operating solely on the basis of wholesale access. “Owner’s economics” and the ability to differentiate still flow from network ownership and control. 

Also, mobile operators increasingly are comfortable outsourcing their core network information platforms to public cloud providers, showing yet another way that service providers are rethinking the ownership versus leasing of platforms and capabilities. 

All of this should lead to a rethinking of where sustainable advantage lies, for service providers. How much of the core infrastructure they once developed and owned becomes less strategic over time. How far can the “asset light” approach be carried?

U.S. FTTH Seems Poised to Accelerate

GlobalData expects the number of U.S. fiber-to-home subscriptions will grow at a compound annual growth rate of 10.8 percent and reach 28.2 million accounts by year-end 2026.

If total U.S. home broadband accounts number 112 million at that point, as GlobatData predicts, then FTTH would represent about 25 percent of total subscriptions. 

source: S&P Global Intelligence 

As other forecasters estimate, cable operators will gradually lose installed base share to other internet service providers between now and 2026. 

Cable’s share of total US fixed-broadband subscriptions will decline to 67.1 percent  by year-end 2026, down from 68 percent in 2021, Global Data estimates. A different enumeration, including mobile-only households, suggests cable has 65 percent of the installed base, while telcos have 27 percent. 

Total U..S fixed-broadband lines, including fiber, fixed wireless and cable, will increase from 103.1 million in 2021 to 112.3 million by 2026, the firm predicts. 

Unclear at this point is how faster FTTH deployment could change those scenarios. Most observers believe faster FTTH is coming, paced by ISP competitive concerns and more government subsidies for faster home broadband. 

Many of us would now bet that the FTTH deployment rate will exceed 10 percent per year to the end of the decade. Some forecasts already call for 14 percent annual growth, for example. 

Singtel Financial Return Shows Potential Value of a Portfolio

Singtel’s latest quarterly results illustrate one connectivity provider  growth strategy: a portfolio of assets without majority ownership or control. 

To be sure, the core connectivity business continues to produce most of the revenue and free cash flow. But growth largely is driven by businesses in adjacencies: business services, data centers, advertising and minority stakes in other connectivity providers, where  revenue grew 21 percent.  

The point is that organic growth in the core connectivity business is tough. Connectivity business operating revenue was up about 0.4 percent on an annual basis, the company reported in November 2021. Mobile operating revenue in Singapore declined 1.3 percent on an annual basis. 

Enterprise revenues were flat while voice revenue fell 16 percent. 

Growth is faster in adjacencies. Data center and security services revenue rose 9.6 percent while technology services related to cloud and digital climbed 9.3 percent. 

Also key: profits from ownership stakes in other entities grew 18 percent, especially from its minority interests in Africa and India and the share of profits from those investments. 

In fact, the minority interests drove higher cash flow than did the fully-owned operations. Where cash flow from Singtel’s fully-owned assets produced S$572 million in cash flow, the minority interests produced S$954 million in cash flow, though representing about 13 percent the volume of revenues produced by the fully-owned asserts. 

source: Singtel 

The point is that a portfolio of minority-owned assets can produce significant revenue, cash flow and profit, providing most of the actual revenue growth at the margin. Picking the right assets, in the right markets, matters. 

But the traditional, monolithic “branded” approach to assets is not the only way to attain growth. In fact, that approach is yielding slow to negative growth. 

Telcos long have believed they had to own and control, brand and manage, all their assets. That is not the only model. Looking at growth as including a portfolio of complementary assets not fully consolidated, controlled and managed, can work. 

The trick is to make the right acquisitions, while avoiding the temptation to own and control 100 percent of every asset. It sometimes is not needed, and not helpful.

5G is Being Adopted Faster than 4G

It is easy enough to find stories expressing worry about the “slow” pace of 5G adoption or even the business model. To be sure, there have been business model concerns since 3G, based in large part on the cost of acquiring spectrum. 

Like it or not, data bandwidth--and lots of it--is the driver of the modern mobile business. And that means additional spectrum has to be acquired, like it or not. Fundamentally, it is the same business model issue as fiber to the home represents: service providers would rather not invest the huge amounts of new capex, but it is a necessity to stay in business. 

5G also is an example of the adoption curve for virtually all new innovations, which are adopted in a “S curve” fashion. As far as new use cases, those will take some time to develop, as well, in part because Martec's Law operates. Technology changes faster than organizations change.  

In many cases, the issue is less “where is the new incremental revenue” and more “we get to stay in business.” The investment is fundamentally strategic rather than driven by a simple analysis of the cost versus financial return. 

So slow early adoption should not come as a surprise. 

Ultimately, without the FTTH upgrade, a fixed network services provider will be driven out of business by competitors able to supply gigabit per second speeds and large usage allowances. 

In the early days of any next-generation mobile network coverage always will be uneven, and taht means customer uptake will be uneven.  It always takes time--especially in bigger countries--to deploy the network nationally. 

In the case of 5G, the use of low band, mid band and high band spectrum is a new wrinkle, as potential speed boosts vary dramatically depending on which bands are available. Low band bandwidth is not going to vary much from 4G. Mid band will be faster and high band will be comparable to fixed network performance in some cases. 

In the U.S. market, mid band spectrum has been limited for all but one of the leading providers, while high band deployments also have been limited. So speed increases have been correspondingly low, compared to 4G. 

Also, very next-generation mobile network requires new devices. So it is not surprising at all that consumers say they have not yet already “bought 5G.” They need to buy new phones. In fact, it would be surprising if only 35 percent of U.S. customers actually own phones that are only capable of 4G network access, at this point, as reported in a survey by Speedcheck.org. 

Other surveys might suggest more than 60 percent of U.S. consumers to 75 percent of customers do not yet own 5G-capable devices. But that will change over time, as people replace existing devices.  

Other obvious barriers to adoption are “no 5G service in my area.”

source: Speedcheck.org

None of those issues are terribly worrisome or even new. We are early in the deployment of full national 5G networks by all the leading service providers and the device replacement cycle takes about three years, on average (half earlier, half later). 

For many of us, battery life drives the replacement cycle, and that is closer to two years. At least one survey found that battery life is more important than 5G, for example.  

Every next-generation mobile network requires new devices. So it is not surprising at all that consumers say they have not yet already “bought 5G.” They need to buy new phones. In fact, it would be surprising if only 35 percent of U.S. customers actually own phones that are only capable of 4G network access, at this point, as reported in a survey by Speedcheck.org. 

Other surveys might suggest more than 60 percent of U.S. consumers to 75 percent of customers do not yet own 5G-capable devices. But that will change over time, as people replace existing devices.  

None of those issues are terribly worrisome or even new. We are early in the deployment of full national 5G networks by all the leading service providers and the device replacement cycle takes about three years, on average (half earlier, half later). 

For many of us, battery life drives the replacement cycle, and that is closer to two years. At least one survey found that battery life is more important than 5G, for example. 

Still, 5G is inevitable. Most consumers will switch.

source: YouGov

5G arguably is being adopted faster than was 4G. It just seems “slow” because the networks still are being built.

What Will Permanent Remote Work Mean?

It is not exactly clear what employee  preferences for remote work say about the quality of office life (most people able to work remotely work in offices). Less clear is the environment people actually will have to encounter when they return to the office.  

But McKinsey has estimated that “more than 20 percent of the workforce could work remotely three to five days a week as effectively as they could if working from an office.” 

 source: McKinsey 

Different in-office work patterns that mean fewer workers in the office overall will have other repercussions than worker happiness, company culture, collaboration and productivity, though. 

In pre-Covid days, of  the workforce in advanced economies, between five percent and seven percent of workers regularly worked from home. A shift to 15 to 20 percent of workers spending more time at home and less in the office could have profound impacts on urban economies and even demand for mobile device services. 

In the U.S. market, for example, mobile service providers are pushing customers towards higher-priced unlimited usage plans, precisely at a time when more of us are spending less time “out and about,” and therefore connected to our home broadband and Wi-Fi, reducing the value of such unlimited usage plans. 

More sustainable remote work is going to reduce the value of such plans, as people will be consuming less data from the mobile network. 

More people working remotely means fewer people commuting between home and work every day or traveling to different locations for work. This could have significant economic consequences for  transportation, gasoline and auto sales, restaurants and retail in urban centers, demand for office real estate, and other consumption patterns, McKinsey notes. 

It is conceivable that network demand patterns could shift, with less growth in urban areas, less “commute time” demand and perhaps a bit more demand on suburban cell towers. But overall mobile data demand could grow less fast than previously expected, unless consumers change behavior and simply rely on mobile data all the time, without offloading to Wi-Fi. 

The degree of shift hinges on the percentage of workers, and the percentage of work time, that shifts to remote sites. Lots of people appear to want to work remotely on a permanent basis. Of the people polled by Reed.co.uk, a recruitment website, 35 percent said that they were willing to take a pay cut in exchange for permanent remote working. 

The poll of 2,002 working adults probably is not structured to represent a sample replicating the entire population of workers who could work remotely on a permanent basis, but is in line with virtually all other surveys I have seen on that question. 

Work-life balance probably explains some of the sentiment. Some people, in some jobs, might find they prefer the flexibility of working from home. Others might be the sort of workers most bosses fear: unmotivated and less productive when not seen. 

 source: McKinsey 

The point is that our forecasts of mobile data demand might have to be revised if lots of remote work becomes permanent. Mobile service providers might even find their profit margins improving--in addition to average revenue per account--if customers are on higher-priced plans but usage does not require such plans. 

Then the issue becomes how valuable price certainty is, compared to the ability to buy lower-priced plans with a bit more uncertainty. It is too early to tell how demand might shift if robust remote work on a permanent basis were to develop.

Perceptions of Network Asset Value are Evolving

As more private equity and institutional investment funds ponder taking stakes in digital infrastructure assets--including access networks, data centers and fiber backbone assets--we will have to see where the operator comfort level lies. Few have fundamental qualms about divesting tower assets. 

The issue is how much broader involvement in entire core or access assets could occur. Traditionally, private equity investments  have been concentrated elsewhere, especially in real estate, energy assets, business services and software. But telecom infrastructure investments have been growing. 

source: Toptal 

Telecom transactions accounted for 35 percent of total private equity infrastructure deal value in 2020, up from 15 percent a year earlier, Preqin data shows.

Telecom deals involving towers, fiber and data centers are now viewed as possible holdings in the alternative assets portfolio, which generally focuses on  transport, energy and utilities.

source: S&P Global, Prequin 

The trend has been in place and growing for some time, sometimes driven by the traditional “fix and sell” (leveraged buyout, consolidate assets, flip to strategic buyer) model, but with some increasing longer-term holding as well, where private equity might take a minority stake in an operating company without plans to flip the stake in less than six years.  

source: Columbia Business School 

Recently, some big divestitures of whole networks, accounts and infrastructure have occurred, primarily revolving around rural and less-dense fixed networks. Lumen Technologies recently divested about half its fixed network assets, for example. 

And increasing attention seems to be paid to operating assets more efficiently, a traditional driver of private equity investing strategy. 

source: S&P Global, Prequin 

Asset reshuffling tends to be rather common in the connectivity business, with occasional bouts of merger unwinding. Consider the proposed sale of Lumen fixed network assets to Apollo Global Management.   

Basically, the deal unwinds the merger of CenturyLink and Qwest fixed network assets (more an acquisition by CenturyLink of Qwest) in 2011. What remains for Lumen are the original Qwest local exchange operations, plus networks in Florida and Nevada that were not part of Qwest.

Perhaps more important is the Lumen retention of the former Level 3 Communications assets. The proposed deal still leaves Lumen a bit of a hybrid: operator of large tracts of rural fixed networks, plus a handful of tier-two cities, as well as a global enterprise services network. 

source: Lumen

The larger point is that different financing mechanisms for core telecom infrastructure might be entering a phase where there is more “burden sharing” than in the past with private investors. 

That might be far more successful than regulator-forced sharing.