Will Telco Revenue Mix Really Change Substantially Because of 5G or IoT?

Historically, business customers have generated somewhere between 20 percent and 40 percent of total connectivity provider revenues. In most markets, the percentage is likely to be closer to 20 percent than 40 percent.

When one hears observers speculating about 5G revenue growth, business or enterprise revenues always loom large. What is less clear is the meaning of that observation. 

It might mean that new use cases develop mostly in the enterprise segment, but that total revenue remains generated by the consumer segment. It could mean the historic mix of revenues changes, and that business revenue becomes a larger percentage of total.

Globally, revenue amounts and growth are led by mobility services, and most of that is earned from consumers rather than businesses. But one constantly hears the argument that 5G is going to be different, because of the internet of things, edge computing or private networks. 

Just how different is the issue. 

source: Ovum 

It never is completely clear whether 5G produces, or can produce, enterprise revenues fast enough to change the historic share of revenue in fixed or mobile segments of the business. 

It is easy enough to find projections of total mobile connections that suggest sensors will outnumber phone users by quite a wide margin. But connections are not directly related to revenue on a one-for-one basis, as IoT connections generate revenue an order of magnitude or sometimes two orders of magnitude less than phone accounts. 

source: Strategy Analytics 

Also, many IoT connections will not directly use new wide area networks for access. Instead, local area connections of various types might actually predominate. Ericsson, for example, has estimated that about 15 percent of IoT devices will use mobile networks for connectivity. 

source: Ericsson 

In fact, that seems relatively unlikely, Rather, the emphasis on enterprise revenues typically refers to incremental growth. Some estimate business revenues represent only about 25 percent of total revenues. In some markets business revenue might reach close to 40 percent. 

source: TM Forum 

For a decade or so, service providers also have been urged to consider a range of changes in their operations, from separating retail and network functions to simplifying retail offers. Rarely is specific strategic advice given to emphasize business customer connectivity revenue over consumer revenue sources. 

Service providers are, of course, encouraged to explore new roles and revenues in internet of things, private networks or edge computing, all of which might fall under the “explore market adjacencies” objective. 

source: McKinsey 

It seems unlikely to me that new business segment revenues are going to be substantial enough to fundamentally change revenue dynamics that have most of the total revenue being generated by consumers using phones.

Home Broadband Payback Model Changes Radically When One Subsidizes 75% of the Cost

This is one example of how the business case for fiber to the home and other advanced home broadband networks is changing. Delaware has allocated $110 million to improve home broadband access in unserved and underserved areas, using federal government funds.

The cost of construction will be reduced by about 75 percent for 11,000 locations said to have no fixed networks providing home broadband access. Those locations likely map close to the 11,800 unserved Delaware locations previously identified.  

Comcast won a grant of more than $30 million; Verizon received $11.8 million and Mediacom got $11.1 million. 

For Verizon, the grants mean 940 Mbps home broadband will be made available to 3,000 unserved locations” in Delaware. That implies a subsidy of about $3933 per new line, with Verizon contributing $1311 per line. 

That implies a total cost per new Verizon line of about $5244. 

The awards also imply that 75 percent of the cost per line for the cable companies is about $2275. Assuming Comcast and Mediacom contribute 25 percent of the construction cost, the total cable cost per line is about $3033. 

Network cost is one key element of the payback model; consumer willingness to buy is the other key variable. Consumer willingness to pay is highest at $50 per month and drops off steadily at higher levels. 

source: CTC Technology 

One might infer that at about $100 a month, half the market will not buy. Many studies suggest the U.S. home broadband median monthly price paid is about $60 to $65 or $68 a month.    

Some studies show cable connections are the most affordable, satellite connections the most expensive. Inflation-adjusted prices are lower than $60 per month, some suggest. Analyses can vary based on whether they include additional charges or whether the monthly recurring price reported by a consumer includes those charges. 

Estimates also can vary based on how the analysis is conducted. Comparing posted retail prices is one way; estimating actual prices, including all discount mechanisms, is another way. And some studies weight the results by considering the plans consumers actually buy. 

The key takeaway is that subsidizing 75 percent of the cost of facilities radically changes the payback model for home broadband.

Finally, the End of the Password?

If 110 global organizations including Amazon, American Express, Apple, Bank of America, Google, ING, Meta, Intel, Mastercard, Microsoft, Docomo, PayPal, Qualcomm, Samsung, Visa, Chase, Akamai, Ebay, Fidelity, Fujitsu, Hitachi, Huawei, KDDI, NEC, Netflix, NTT, SoftBank, SKT, Sony, Rakuten, Twitter, Vanguard and Verizon all agree they want something done, and have within themselves the power to mandate usage, do you think that something will remain undone?

And that something is the end of passwords as an authentication and security mechanism. 

For mass market users and app providers, internet security requires low-cost authentication mechanisms with very high assurance levels. “Who are you?” and “Do you have permission to use this app?” are among the key functions authentication mechanisms provider. 

Up to this point, passwords have remained a common authentication mechanism, even if most users and app provider consider the method unsecure and a barrier to user experience. 

Two-factor authentication, multi-factor authentication, biometric (fingerprint or facial recognition), single sign-on, token-based (security dongles) or certificates are other methods. But the sheer number of alternate methods make simple, user-friendly authorization difficult to scale. 

source: FIDO Alliance 

The Fast IDentity Online Alliance (www.fidoalliance.org) was formed in July 2012 to address the lack of interoperability among strong authentication technologies, and remedy the problems users face with creating and remembering multiple usernames and passwords. 

The organization now believes FIDO-based secure authentication technology will for the first time be able to replace passwords as the dominant form of authentication on the Internet.

Multi-device credentials are a key enabler. 

source: FIDO Alliance 

The FIDO Alliance and the W3C WebAuthn working group propose a new version (“Level 3”) of the WebAuth specification using the smartphone as a roaming authenticator, plus multi-device FIDO credentials.

In a sense, this is another application of cloud computing. Credentials are not stored on single hardware devices. When users move to different devices, the credentials still are available because they are independent of any hardware. 

We Actaully Know Very Little About What "Causes" Rapid Economic Development

Even if we accept the validity of the Kondratieff Wave hypothesis, and many do not, potential long waves of innovation, with a duration about 50 years, seem to have disparate impact. 

It is not  true that any particular wave has universally-applicable and substantial transformative effects for all people, all regions, all counties, all firms or all segments of the economy. There always are leaders and laggards. 

source: CFI 

One big criticism of the theory is that there is significant disagreement about when such waves have started and ended in the past. Being off by 20 years might not matter for a historian. It is life and death for firms who are too early or too late. 

Some argue the last wave ended in 2008, for example. Others believe that wave has not ended yet. Keep in mind there is a couple decades long pause between waves, characterized by recessions or slow growth. 

If the last wave has ended, it might be decades before the next wave is identified. 

source: Seeburger 

Just as important, nobody knows when the next wave will break, though the theory suggests a new wave might be building. It all depends on where one believes the last cycle will run for a couple more decades or has already ended. 

source: Wikipedia 

Still more contentious is the driver of the next wave. Lots of candidates will be offered. Perhaps none seem especially credible at this point. 

source: Insead 

It might seem obvious that the long wave theory is not precise enough to be useful for guiding firm strategy and investments. The larger point might be that even when we can correctly identify which era we might be in, such knowledge does not mean we have a magic bullet that causes economic growth everywhere, at the same rates. 

It is similar to the argument that quality broadband causes economic growth. We might have made the same arguments about railroads, steam power, electricity, internal combustion, mass production or information technology. 

Growth happens, but whether the underlying technologies can be harnessed everywhere, by everyone, at high levels, has proven untrue. Areas of low population density, for example, rarely benefit as much as areas of high population density. 

Societies without a firm rule of law that protects property rights rarely, if ever, develop as much as regions with such protections. In fact, we probably continue to know very little about why development actually happens in particular circumstances.

Historically, productivity and population increases are associated with economic growth. Obviously population growth happens in lots of places without much growth. Productivity growth likewise is uneven.

"Keeping Whales Safe" Using IoT, Edge Computing and Artificial Intelligence

Whale Safe, a project of the nonprofit Benioff Ocean Initiative, is deploying buoys with acoustical sensors using on-board artificial intelligence and edge computing in key whale habitat off the coast of southern California. 

The analysis of actual whale locations, correlated with movements of ships in the channel, helps avoid whale strikes by the ships moving in one of the most-trafficked sea lanes globally. 

The use case illustrates why it often is hard to clearly delineate "edge computing" value from that of "artificial intelligence" from "internet of things."

source: Whalesafe 

Ships are asked to slow down when whales are located in their path, since collisions between ships and whales are often fatal. 

Since deployment of the system in 2020, whale strikes declined significantly in the Santa Barbara Channel, which is one of the most active feeding grounds for humpback and endangered blue whales on the West Coast.

AI Applications Forecasts Get Revised Upwards at IDC

Spending on artificial intelligence in the United States will grow to $120 billion by 2025, representing a compound annual growth rate of 26 percent between 2021 and 2025, says IDC, which projects that the U.S. market will constitute half of the global market. 

So that implies a global AI applications market of about $240 billion by 2025.

That represents a “robust” expectation, as it lies at the top end of Omdia forecast ranges of revenue earned from AI software sales. 

source: Omdia 

Forecasts will vary significantly based on what is included in the definition: app software only; hardware; system integration services; consulting; AI feature upgrades to existing products. 

If you have ever worked doing market research, you know everything rests on the assumptions. 

The IDC and Omdia forecasts seem to include only AI apps. Almost arbitrarily-larger figures would result if we looked at all AI-related revenues, from chipsets and programming tools to hardware and professional services. 

Still, the IDC methodology suggests a significant new market, even if some of the reported revenue is likely cannibalized from other existing product segments. And IDC has ramped up its forecasts. In 2020 it predicted global revenue by 2024 of only $110 billion. Now IDC expects U.S. AI spending alone (on applications) to reach $120 billion. 

source: IDC 

Retail will remain the largest U.S. industry for AI spending while banking will be the second largest industry, says IDC. Augmented customer service agents, and expert shopping advisors making product recommendations will drive about 40 percent of AI spending in the industry, IDC predicts. 

These two industries will represent nearly 28 percent of all AI spending in the United States in 2025.

But professional services, media, and securities and investment services industries will have CAGRs greater than 30 percent, IDC notes. 

AI spending in the banking industry will be spread across customer service (program advisors and recommendation systems); fraud Analysis and investigation) and security.

Customer service and sales will represent more than 20 percent of all AI spending in the U.S. market in 2025, across most industries, IDC projects.

Home Broadband Prices Can be "Higher" Without Being "Too High"

We often hear, often without use of supporting data, that U.S. home broadband prices are high and speeds slow. When data is used, it most often is comparative to other countries. That can be done, with or without adjusting for purchasing power across countries. 

As has been the case for other U.S. connectivity services, the United States does not typically rank “first” on such global comparisons. Any rank between nine and 15 would be expected. There are valid reasons for that, in substantial part due to the large percentage of the U.S. land mass that is lightly or uninhabited. 

But there are other ways to compare prices. Consider general price levels and inflation, for example. 

In one sense, we can note that U.S. price levels are “higher” for almost every category since 1950, for example. 

Prices in 2022 are 11.77 times higher than average prices since 1950, according to the Bureau of Labor Statistics consumer price index. A dollar in early 2022 only buys about 8.5 percent of what it could buy in 1950. By the end of 2022 the dollar will buy less, as the inflation rate has exploded. 

source: U.S. Bureau of Labor Statistics 

So are prices higher in 2022 for virtually anything than in 1950? And, if so, would we really expect prices for home broadband to be “lower” in an absolute sense?

But you might object that internet access did not exist in 1950. So consider general U.S. price changes since 1996, when people were buying internet access. Since 1996, U.S. prices have increased almost fifty percent, accounting for inflation. 

source: OfficialData.org 

In other words, according to the U.S. Bureau of Labor Statistics, a unit of U.S. currency in 2022 buys about 52 percent of what it bought in 1996. Stated another way, price levels in 2022 are about 50 percent higher than they were in 1996. 

So virtually any product can be accused of “costing more” in 2022 than it cost in 1996. 

Some may intuitively feel this cannot be the full story where it comes to digital products. That hedonic change.

Hedonic qualIty adjustment is a method used by economists to adjust prices whenever the characteristics of the products included in the consumer price index change because of innovation. Hedonic quality adjustment also is used when older products are improved and become new products. 

That often has been the case for computing products, televisions, consumer electronics and--dare we note--broadband internet access services. 

Hedonically adjusted price indices for broadband internet access in the U.S. market then looks like this:

source: Bureau of Labor Statistics 

In other words, dial-up internet access and gigabit broadband are not the same product. 64 kbps internet access is not the same product as 10 Mbps broadband. And 10 Mbps broadband is not the same product as gigabit or multi-gigabit home broadband. 

In comparing digital prices over time, one must adjust for inflation and hedonic quality changes to really understand real prices. 

This is an applied instance of Moore;s Law at work. The cost of computing power, for example, has continually dropped since 1940, for example. 

source: Hamilton Project

So has the cost of bandwidth seen hedonic changes and falling prices. Many will note the revenue per unit trends and cost per unit trends that are part of the capacity business. 

Compared to 2008, fixed network broadband costs have fallen, globally, though there is a slight rise in developed nations, driven by consumer preferences for higher-priced and higher-speed services, according to International Telecommunications Union data. 

source: ITU 

To be sure, most of the improvement has happened, since 2008, in developing countries. Prices in developed nations have been relatively low, and stable, since 2008. 

But while prices have stayed essentially flat, speed and bandwidth consumption allowances have risen steadily. In real terms, and adjusting for hedonic changes, U.S. home broadband prices have dropped dramatically since 2017, according to Bureau of Labor statistics. 

The point is that if all prices in the U.S. market have gone up since 1950, since 1996 or for any other time period, so would we expect prices for home broadband to rise, with the general change in overall prices. 

It is possible to argue that even if home broadband prices have risen, the reasons are inflation--all prices are higher--or product quality changes (hedonic change) or consumer preference for different products (gigabit speeds rather than 100 Mbps to 300 Mbps). 

A Tesla is not a Honda Civic. People pay more for the former than for the latter. But does that mean “car prices” have risen? Yes and no. Inflation drives prices higher over time. But when product differentiation is possible, consumers make different choices about what to buy. 

A Civic owner who then buys a Tesla is arguably not buying the same product. When customers can buy a 100-Mbps service at the low end or 5 Gbps on the high end, “average” price is misleading. 

Beyond that, which prices do we choose to compare? Do we analyze the services “most frequently bought?” Do we use posted retail prices or do we also include buying patterns that feature price discounts, such as product bundles? 

Do we measure price per household, per user, per megabit per second, per consumption or something else? 

If consumer demand shifts, how do we incorporate such shifts into the analysis? It is permissible to argue that home broadband prices “have risen.” It also is intellectually honest to admit that all prices have risen over time. 

One may argue that U.S. prices are “too high.” But it is honest to explain “in relation to what?” Are we comparing a continent-sized situation to a small city-state? Or are we comparing a substantially-rural market to a highly-urbanized market? 

In Canada, 14 percent of the people live in areas of density between five and 50 people per square kilometer. In Australia, 18 percent of people live in such rural areas.

In the United States, 37 percent of the population lives in rural areas with less than 50 people per square kilometer.

Put another way, less than two percent of Canadians and four percent of Australians live in such rural areas. In the United States, fully 48 percent of people live in such areas.

Coverage is an issue in such rural areas. About six percent of the U.S. land mass is “developed” and relatively highly populated. Those are the areas where it is easiest to build networks. 

But about 94 percent of the U.S. land surface  is unsettled or lightly populated, including mountains, rangeland, cropland and forests. And that is where networks are hardest to build and sustain.

That does not directly shape retail prices. But density does affect when and where sustainable networks can be built, even including government subsidies. 

Are home broadband prices “higher” in 2022 than in 1996? A reasonable person could answer “yes” without also arguing prices are “too high.”