Less than 25% of U.S. Commercial Buildings Have Fiber Connections

Roughly 1.3 million--24.7 percent of the five million commercial buildings in the United States are lit with optical fiber, according to Vertical Systems Group. That is an improvement from the 11 percent of fiber-connected buildings in 2004, for example.  

That suggests the large number of smaller locations where demand is not believed to support immediate fiber-to-location deployments. 

As you would expect, the larger buildings have been wired. Buildings with 20 or more employees had fiber access at nearly 75 percent.

Buildings with fewer than 20 employees had a fiber access rate of about 16 percent. 

Cable operators saw an opportunity there and have made a business out of supplying higher bandwidth to such locations using hybrid fiber coax access. Small business connections, in particular, were an early focus for cable operators, as some have estimated that 80 percent of small businesses did not require gigabit connections.

BT Business Push Reflects Market Structure

BT's new push to support business customers makes sense for a couple of reasons, but primarily because much of the revenue earned by a telco or mobile operator comes from business customers. 

source" Grand View Research 

Also, much of the new revenue from 5G is expected to come from business use cases. 

The other obvious angle is that there is only so much revenue connectivity providers can coax out of consumers, who tend to spend less than three percent of their income on all communication services and devices. 

Even when business customer spending is not materially higher, percentage-wise, the gross revenue and profit margins tend to be much higher than for consumer services. 

source 

And that matters, as telco return on invested capital has been falling since 2010. Industry supporters cite government regulation as a possible way of boosting returns. The call for payments by a handful of giant app providers to fund telco infrastructure is an example of that. 

source: McKinsey

Major Channel Conflicf in Internet Ecosystem

Channel conflict always exists, to some extent, in any value chain, since one participant’s revenue model is another participant’s cost of doing business.

That has been an issue in the internet ecosystem for some time, as app creation and ownership has been separated from network facilities ownership. In other words, the very organization of the internet and computing separates functions into layers that operate independently of each other.




source: GSMA

Participants in the ecosystem act in a “permissionless” manner. And that always has irked connectivity providers, as any person with access rights or any lawful app can use the network without a formal business relationship with the underlying network.

So the connectivity industry now is making a push to alter revenue models. Consider a couple of analogies. What if refrigerator manufacturers and air conditioning suppliers had to pay electrical utilities additional fees because they drive electrical use on the grid?

Connectivity providers argue about revenue or valuation shares to make the argument that they are due more value from the ecosystem. But that is like arguing all appliances and apps using electricity collectively represent the vast proportion of value in the “anything using electricity” ecosystem.

That is the case in virtually every ecosystem: the things humans do that use electricity are vastly more “valuable” in economic terms than the value of electricity that gets sold. In other words, things people buy and businesses sell is the bulk of value in any area.



source: GSMA

It is not a stretch to argue that increasing costs for some participants to shift revenue to some other part of the ecosystem is simply part of the normal desire of any participant to “make more money.”

In a sense, that is “calling party pays” in the communications business. That also is the principle behind “access fees” paid by one carrier to another when customers place calls between networks. If one network terminates a call placed by a customer on another network, the receiving network is paid for the use of its network to do so.

The model actually works in the reverse in the water supply business in the United States. The heaviest users--farmers--pay far less for water than do the lighter household users. You can think of all sorts of public policy reasons why that should be the case, but the point is that subsidies and prices in an ecosystem can vary, and will be the source of channel conflict within an ecosystem.

In the end, the retail buyer pays for all the other profits of all the other participants in any ecosystem. A sustainable infrastructure matters as much as sustainability for all the other essential parts of any ecosystem.

But make no mistake: what connectivity providers propose is similar to charging third party appliance, app, content or other suppliers in the ecosystem to use a network that--like any other utility--ultimately makes its money charging its own customers for usage.

There is nothing magical about business models. Markets can be created and sustained with revenue created both by buyers and sellers; users and customers; suppliers and consumers. To the extent that government can change the rules shaping any industry’s business model, there is nothing “unlawful” about some entities proposing that the government change rules about how internet access services are provided.

The proposal by connectivity providers that both customers (end users of connectivity services) and partners supplying appliances, apps, services and content also pay for access is, however, a change of business model for any utility-type business (natural gas, drinking water, sanitation; waste management; electricity and telecommunications).

Some might point to airports as an example of such “both sides pay” models. Airlines pay landing fees to airports. Passengers pay airlines for travel. But airlines also recoup the cost of landing fees from passengers. So, ultimately, passengers pay for the landing fees of the airlines.

Connectivity providers propose something along those same lines. It is not unusual nor unlawful for them to try. It would not be unlawful if implemented. But customers (or end users) would still wind up paying, as all the other participants who are assessed new costs would find ways to recover those costs from their own customers.

Those “customers” would be advertisers in some cases, who would then recoup their own higher costs by passing them on to retail buyers in some fashion. In principle, the costs could be partly passed onto their own suppliers or investors.

Sustainable infrastructure is a good thing. Sustainability for the rest of the ecosystem is a good thing as well. But this a prime example of channel conflict.

The Internet Already is "Balkanized"

International communications have always been borderless in a controlled way. Both governments and service providers have guidelines about how and when communications can cross borders. 

Oddly enough, there are more barriers in the internet era, in large part because governments always have controlled the movement of content across borders.

So  regulation might be a bit different in the internet era, but it has not gone away, by any means. In fact, more barriers exist, compared to the days when only voice crossed borders. 

Governments routinely block some content, a process that has been obvious for some time.

source: Freedom House 

The internet is not borderless.

How Will We Know FTTH and 5G Have Succeeded?

How will we know either fiber to the home or 5G has been successful? As with anything else, what one hoped to achieve matters. As always, there are many possible answers: minimum case and best case.

For policymakers, either FTTH or 5G policy succeeds once the networks are built. Even for service providers, FTTH and 5G succeed if they enable fixed and mobile network operators to remain in business: they are competitive with other service providers, for example.

Policymakers can claim victory if the networks are built. Nothing else really has to happen.

Service providers win if they are not driven out of business; if they maintain or slightly increase revenues; if they maintain profitability.

Infrastructure providers win as they are able to fuel sales for one more generation of networks. App providers win as the new networks help create more room for feature and performance advantages.

Consumers win if their experience includes lower latency and high speeds, for about the same price as the older platforms supplied.

There are likely to be some new use cases and revenues, to be sure. But none of those use cases will match the importance of the "minimum" outcomes outlined above.

One must ask what the “real value” is from several vantage points. Most fundamentally, mobile operators need more capacity to keep up with growing customer data consumption, only some of which can be satisfied by the other traditional mechanisms of creating smaller cells, using better radios, offloading traffic and shaping demand. 

From a mobile operator’s perspective, 5G arguably succeeds if it simply allows operators to keep pace with end user data demand, while operating with higher cost-per-bit efficiency.

In other words, 5G succeeds if it allows mobile operators to supply more data at about the same retail price. Some might complain about the need to keep reinvesting, but that is foundational to the business. 

About every decade, we have found, a new block of spectrum is required and a new network has to be built. 

In part, that is because of saturation of the available capacity on the existing networks and in part because technology advances typically provide an order of magnitude improvement in capacity and latency performance with every next-generation network. 

All that helps mobile operators maintain or improve their core businesses in terms of revenue, profit margins, equity prices and market share. Fundamentally, 5G is about “keeping your business.” 

Of course, there are other ways to look at outcomes. How do mobile operators and others in the untethered ecosystem convince regulators to release additional spectrum? Economic growth; protection of supply chains; support for domestic industries; consumer and business benefits; educational and social benefits and jobs are outcomes governments want, so mobile operators almost have to argue that 5G supports such outcomes. 

Perhaps looking at 4G will help with the assessment. Questions about payback were relatively frequently expressed early in the global rollout of 4G mobile networks, even as proponents emphasized possible new applications. 

source: TechTrained 

Capacity and lower cost per bit always seem to be among the key values of any next-generation mobile network, even if such platforms are pitched as “new application” drivers. The reasons are fairly pedestrian. 

To convince regulators to allocate significant new spectrum, mobile advocates must emphasize all the potential benefits for economic growth, national security, innovation leadership and so forth. 

It simply does not sell well to argue “you need to give us more spectrum so our business models remain intact” or “so we can lower our cost per bit.” 

Nor should we discount the eventual emergence of new apps and use cases made possible because of lower latency and faster speeds. 

But we do not need 5G to do anything more than sustain the existing mobile business model to claim success. All that other hype about new apps is simply the best argument mobile operators have for convincing regulators to release more spectrum. 

Infrastructure suppliers, likewise, have every incentive to convince mobile service providers that they are in danger of falling behind, or missing out on revenue growth, if they do not upgrade. 

In such circumstances, we can simply assume that 5G succeeds if mobile operators still have a positive business case. Everything else is nice, but not essential in the short term.

Rural Broadband Quality is an Issue, if Not the Issue Policymakers Often Suggest

A survey conducted by the U.K.-based National Innovation Centre for Rural Enterprise (NICRE) differences confirms what virtually everyone would acknowledge: rural broadband networks are perceived to be worse than urban networks in terms of speed, for example. The NICRE also argues that inferior broadband also reduces rural firm resilience. 

source: NICRE 

The obvious solution to this problem is to improve the quality of rural broadband. That should be done, of course. But the claimed upside from such improvements is hard to quantify. 

The problem is that rural areas virtually always have more of some attributes and less of other attributes that correlate with economic growth. 

Rural areas have fewer businesses, fewer jobs, lower wages and longer transport distances to urban areas. That lower density of activity is directly reflected in opportunities to foster economic growth.

source: Internatiional Labor Organization 

Rural areas also tend to have lower average household incomes, lower educational attainment and  older average age profiles. All of those attributes are correlated with lower use of technology in general. 

The point is that rural area broadband quality does tend to be lower than what is found in urban areas. But so are most other measures of economic activity. Even if rural broadband were, in every respect, identical to what is found in urban areas, those other correlations would continue to exist. 

Even if quality broadband were to eliminate virtual good distance issues, broadband would not eliminate the distance issue as it pertains to all physical goods. And that would still shape rural area ability to improve economic growth. 

Nobody would likely argue that quality broadband makes rural life worse. Policymakers always argue quality broadband makes economic growth or rural life better. But it remains plausible that even quality broadband will do little to boost economic growth in rural areas.

The reason is that the drivers of rural underdevelopment are not created or significantly hindered by broadband quality. Low population density, logistical distance, educational attainment gaps and lower household wealth and the movement of young people to cities all combine to limit growth opportunities. 

Better broadband is not going to change that much, if at all.

Pareto Theorem Suggests Where and Why Millimeter Wave Spectrum Will be Useful

Pareto distributions--often colloquially referred to as the “80/20 rule.--are common in business, technology and nature.

Most of us are familiar with the 80/20 rule, which suggests that roughly 80 percent of value or outcomes are generated by about 20 percent of actions. Formally, it is the Pareto theorem. 

Virtually nobody would be surprised if told that the highest data demand in the U.K. mobile services market comes from areas such as London, Manchester or Glasgow, which are major population centers. 

What might be more surprising is that cell site data demand is about as disparate as the population data would suggest. According to Ofcom, the U.K. communications regulatory body, the largest 20 cities, containing 32 percent of the total U.K. population, cover about 2.4 percent of the surface area. 

source: Ofcom 

In fact, cell locations and data usage tend to show a Pareto distribution. Pareto would suggest that about 80 percent of mobile data usage is generated by 20 percent of the locations. 

source: Medium 

Pareto applies to most aspects of the connectivity, data center or computing businesses. It even applies to revenue generated by mobile cell sites. Half of mobile revenue is driven from traffic on about 10 percent of sites. Fully 80 percent of revenue is driven by activity on just 30 percent of cell sites. 

source: Ericsson 

Pareto also applies to mobile operator and telco revenue, profits, accounts and cost.  

source: Telco Strategies

That is clear in the distribution of customer accounts, ranked by revenue potential.

source: B2B International

source: Ofcom 

That Pareto distribution of data usage also shows where and why millimeter wave spectrum will prove useful. The skewing of data demand in a relatively small number of dense, urban areas suggests millimeter wave’s capacity advantages will prove most valuable there, as Verizon has argued. 

source: Verizon