How Disruptive is 5G Fixed Wireless?

Many observers have argued fixed wireless would not be a material driver of U.S. home broadband market share change. Just as vehemently, T-Mobile and Verizon have argued for precisely that impact. 

Cable operators say they have not seen material impact, yet. But at least some equity analysts now say fixed wireless will be highly disruptive. Wells Fargo telecom and media analysts Eric Luebchow and Steven Cahall predict fixed wireless access will grow from 7.1 million total subscribers at the end of 2021 to 17.6 million in 2027, growth that largely will come at the expense of cable operators. 

source: Polaris Market Research 

The impact on the installed base will occur more slowly, but the primary impact will be seen in net account additions. Accustomed to getting as much as 94 percent to 100 percent of net account growth, cable might see net new additions drop to perhaps 30 percent to 35 percent in 2023.

If 5G fixed wireless accounts and revenue grow as fast as some envision, $14 billion to $24 billion in fixed wireless home broadband revenue would be created in 2025. 

5G Fixed Wireless Forecast
	2019	2020	2021	2022	2023	2024	2025
Revenue $ M @99% growth rate	389	774	1540	3066	6100	12140	24158
Revenue $ M @ 16% growth rate	1.16	451	898	1787	3556	7077	14082
source: IP Carrier estimate

How important 5G fixed wireless might be depends on which estimates we use for total home broadband revenues, as well as the expected 5G fixed wireless growth rate.

By some estimates, U.S. home broadband generates $60 billion to more than $130 billion in annual revenues. The worse-case scenario for cable operators would be the higher growth rate and the lower revenue base. 

If the market is valued at $60 billion in 2021 and grows at four percent annually, then home broadband revenue could reach $73 billion by 2026. $24 billion would represent about 33 percent of total home broadband revenues. 

		2022	2023	2024	2025	2026
Home Broadband Revenue $B	60	62	65	67	70	73
Growth Rate 4%
Higher Revenue $B	110	114	119	124	129	134
source: IP Carrier estimate

If we use the higher revenue base and the lower growth rate, then 5G fixed wireless might represent about 10 percent of the installed base, which will seem more reasonable to many observers. 

Assuming $50 per month in revenue, with no price increases at all to 2026, 5G fixed wireless still would amount to about $10.6 billion in annual revenue by 2026 or so. That would have 5G fixed wireless representing about 14 percent of home broadband revenue, assuming a total 2026 market of $73 billion.

If the home broadband market were $134 billion in 2026, then 5G fixed wireless would represent about eight percent of home broadband revenue. 

Keep in mind that telcos and independent internet service providers also are expected to take share using fiber-to-home facilities as well. While Verizon expects most of its net additions to come from 5G fixed wireless, T-Mobile expects virtually all of its net additions to come from 5G fixed wireless. 

Indoor Voice is a Bigger Problem by 2 Orders of Magnitude in U.K. than Home Broadband

U.K. consumers are far more likely to face problems with voice network coverage than home broadband coverage, a new report by Ofcom suggests. Indoor voice and text messaging availability is about 85 percent to 92 percent. 

The percentage of homes unable to get at least 10 Mbps internet access is about 0.3 percent. 

That is a two orders of magnitude difference. Internet access keeps getting better. It is not so clear whether voice improvements will happen at anywhere near the rate home broadband gets better. 

source: Ofcom  

source: Ofcom  

The point is that we sometimes do not put progress into perspective. At least in the United Kingdom, the home broadband problem pales before the problem of supplying voice and text message access indoors. 

About two thirds of U.K. households can buy gigabit home broadband access. Some 96 percent can buy access at a minimum of 30 Mbps. 

source: Ofcom  

The bigger problem, by far, is indoor voice and messaging.

Valuation Differences Between Hyperscalers and Telcos Lead to False Analogies

We have all repeatedly seen comparisons of equity value of hyperscale app providers compared to the value of connectivity providers, which show the valuation differential between them. 

The comparison often is used to show a huge gap between the equity performance of telcos compared to hyperscale app providers, usually within the context of an argument that connectivity providers create value for others that should be shared with the access providers. 

source: Statista 

That is arguably not valid. Different industries often have different valuations. And those expectations are based on revenue growth. Hyperscalers grow fast, telcos do not. That is why the valuation differential exists.

Without internet access, hyperscalers would not exist. But that also is true of electricity, computer chips, computing devices and software.

source: Seeking Alpha 

And hyperscale app providers most certainly are valued more highly than most other firms in most other industries.

Consider the industry price-to-earnings ratio. Software might have a trailing P/E ratio of 111, meaning the stock price is 111 times earnings. An energy company might be valued at nine to 10 times. The disparity also exists for the expected earnings (forward P/E). 

source: Broker Chooser 

The point is that some industries are valued more highly than others by investors, even when many of those industries use products supplied by other industries. Health care relies on telecommunications, real estate, energy and information technology, but all those industries are valued at higher average P/E ratios than “telecommunications.”

source 

Telco executives argue that hyperscaler value is “based on” the use of access networks. But most products use railroads, water, electricity, airports and airplanes, trucks, wastewater systems, natural gas and other “utilities” including internet access. 

Equity valuation has nothing to do with “who uses what and when” but only expected earnings growth. 

source: STL Partners 

Hypescaler revenue is expected to grow much faster than access provider revenue. But the internet economy includes some parts of most industries, all all use internet access to some extent. 

The analogy might be to all industries and their use of electricity. Yes, electricity has high value. Yes, almost everybody and every organization uses electricity. But it is nonsensical to argue that therefore electrical energy providers “create economic value” that should be shared with the energy producers.

Rule of Three Seems to Hold, Whether Facilities-Based or Wholesale is the Access Mechanism

Communications policy makers long have believed that where facilities-based competition is not possible, a robust wholesale framework is the best alternative. And at least where North America or Europe are concerned, that belief seems justified. 

Whether reliance on wholesale or facilities competition is authorized, market share structures tend to be fairly similar: leadership by three firms, corresponding to the rule of three. 

“A stable competitive market never has more than three significant competitors, the largest of which has no more than four times the market share of the smallest,” BCG founder Bruce Henderson said in 1976.  

Codified as the rule of three, the observations explains the stable competitive market structure that develops over time, in many industries. 

That 4:2:1 pattern suggests that the market leader has twice the share of provider number two; which in turn has double the share of provider number three.   

In the fixed networks, though we might argue the market share pattern is not yet stable, that suggests a mobile or fixed network market should be led by three firms. 

source: ACCC

In the French fixed network internet access business, which is largely based on use of wholesale access, share structure is not too dissimilar to that seen in Australia, which uses a wholesale approach. 

source: Point Topic

In the United Kingdom, which has a wholesale regime for fixed network internet access providers, but also has facilities competition from O2 Virgin, market share structure also is not dissimilar from markets where competition is largely wholesale based. 

source: Statista 

In the U.S,. fixed networks market, which relies on facilities-based competition, we also see the “market leadership by three firms” pattern. The qualification is that no fixed network  firm is actually allowed to cover the entire market, which adds a bit more fragmentation, in terms of firms with four percent to five percent market share. 

Source: Leichtman Research Group data, IP Carrier analysis

The Downsides of Cryptocurrency

As with money itself, it often is hard to determine whether cryptocurrency is inherently good or bad; it depends on how it is used. 

Cryptocurrency often is said to offer the values of lower transaction costs; greater security; lower fraud exposure and possibly even categories of money that cannot be used for certain purposes, or by certain persons.

That might be either a tool for political suppression or liberty; safety or danger. Money that cannot be used in certain ways which might protect children. It could prevent some forms of money laundering and crime. 

It could just as easily be used by governments or groups to suppress political freedom and civil rights, as if a government-sanctioned or controlled crypto could be programmed to prevent certain types of spending by some individuals or groups. 

If we already see efforts to destroy the businesses or careers of people whose views are considered noxious (even if simply views one does not support) you can see where the temptation to do so using crypto features does exist. 

But crypto also raises other issues, including among them the most basic question of “what is money?” Can it function as a medium of exchange that--like all money--reduces transaction costs? There is the related issue of whether crypto also can function as a store of value like gold.  

Some believe cryptocurrencies could enhance financial system resiliency as well, in part by separating the lending function from other financial services including payments.  

And since micropayments are viewed as a feature of Web 3.0, there is a relationship between cryptocurrency and different Web monetization methods, including the ability to pay content creators. 

Eventually, thoughtful protections will be necessary to prevent the darker side of crypto from emerging in ways that attack civil liberties and human freedom.

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