Actually, Consumers Might be Relatively Resistent to Connectivity Service Provider Switches

Nobody would be surprised if told that, in general, consumers will switch products and suppliers for a better price or better value.

But consumers also intuitively understand that some savings are more important than others. In other words, there might be limits to the amount of effort most consumers will put into comparing connectivity service offers. 

Put another way, there is only so much a consumer can save by aggressive shopping for connectivity services. So it appears many do not bother. Some studies suggest that typical churn rates now are fairly low in many markets, for many services. Contracts and high prices, as well as intensity of usage, are some drivers of higher churn, as you might guess. 

source: Researchgate 

While Australians are happy to switch for a better price or customer experience, almost 50 per cent of surveyed respondents admit to doing either no research or a basic level of research before choosing their internet provider (47 per cent), according to Commonwealth Bank research.  

Switching barriers seem to exist. Some 60 percent say they worry competitive offers will be the same, or perhaps worse. That is probably much more true for experienced consumers who have had multiple suppliers in the past. 

Not to be discounted: there is a learning curve with any new provider. Once a customer has become familiar, switching barriers increase, which is why 42 percent of those surveyed say they are comfortable with their existing providers. 

Once a customer has figured out that a current provider supplies the expected value at a reasonable price, with acceptable customer service, account longevity actually is a good predictor of future “low churn” risk. 

Issues with service quality, in contrast, are a very good predictor of high churn risk. 

source 

The point is that although consumers are expected to prefer “saving money,” the incentives to research alternate providers are low, relative to search effort. Most consumers likely perceive a zone of reasonableness where value and price are concerned.

Most consumers rightly perceive that offers from competitors most often tend to be equivalent in many respects. 

“The common perception is that changing Internet providers is more hassle than it’s worth,” More CEO Andrew Branson says. 

Most consumers likely see switching costs in the form of new gear that has to be purchased or leased, set-up charges, possible contract requirements, bundling with other services that might also have to be changed, and uncertainty about intangibles such as customer service ease, signal quality and consistency.

At any given point in time, perhaps 90 percent of consumers are probably satisfied enough that unhappiness is not driving them to consider switching connectivity providers. In the U.S. mobile market, for example, fewer than eight percent of consumers say they are “likely” to switch service providers at any given point in time. A smaller percentage actually do so. 

source: Bain 

Switching behaviors for products that have little switching cost are robust, one might argue.  

For fixed services, much switching behavior is related simply to a household move from one area to another that also requires switching service providers.   

Does 5G Violate Network Neutrality Principles? COAI Head Says it Does

For every public purpose there are corresponding private interests. The same might be said of connectivity provider regulation. That is the only explanation for a mobile operator association arguing a key 5G capability inherently violates network neutrality principles.

It is so odd an argument that some other agenda must be at work.

Is network slicing--a new feature of the fully-deployed 5G network--a threat to “network neutrality?” Possibly, says SP Kochhar, Cellular Operators Association of India general director. At first glance, it is an odd position for a mobile industry group to take. 

"In essence, the main network will be like economy class, and ones derived out of slices with different parameters can be business class or first class,” says Kochhar. 

Built into the 5G standard is the ability of the core 5G network to create virtual private networks that can vary parameters such as latency and bandwidth prioritization. The industry has argued that such features allow creation of customized networks that are essentially “tuned” for use cases that are latency-dependent or bandwidth availability dependent. 

Industry proponents have argued that this creates new revenue potential for mobile operators. So what are we to make of COAI virtually arguing that network slicing violates network neutrality principles?

One has to work backwards. Since network neutrality prohibits “quality of service” mechanisms for consumer customers, Kochhar is virtually arguing that the 5G network core network should be prohibited from offering network-slicing-based services. 

What conceivable benefit is seen? 5G is possible without building out the full 5G core network: 5G end user services can be delivered over the 4G evolved packet core network. 

So perhaps COAI believes a bar on network slicing would mean India mobile operators could introduce 5G using the 4G core network, which would delay capital expenditures for a time. 

Also, mobile operators believe the ability of enterprises to acquire their own spectrum to set up private 5G networks is a dire threat to public 5G. They believe as much as 30 percent to 40 percent of enterprise mobility revenues are at stake. That seems an exaggeration, though it is conceivable that an enterprise 5G network could reduce demand for public 5G resources when users are “at work.” 

True “mobility” needs would not change because an enterprise 5G network exists. In essence, a private 5G network would allow organizations to offload public network traffic to the private network in the same way that they already can offload public network traffic to Wi-Fi. 

And most mobile operators consider that an advantage, not a problem. 

So it seems the invocation of the network neutrality “problem” is part of an effort to delay 5G core network requirements.

The Department of Telecommunications (DoT) defines net neutrality as the concept of non-discrimination of internet traffic by intermediate networks on any criteria. 

"The network should be neutral to all the information being transmitted through it. All communication passing through a network should be treated equally, independent of its content, application, service, device, sender or recipient address," DoT rules say.

Network neutrality means different things to different people, and is applied to different instances in different countries. The basic idea is that internet service providers (and not other entities) should provide nondiscriminatory consumer access to lawful internet content regardless of its source or destination. 

Generally speaking, internet access services sold to businesses are not covered. But many regulatory entities have added concepts. Some regulators hold that net neutrality also means ISPs cannot offer a “free tier” of service or allow sponsors to defray the cost of access to their services. 

But net neutrality is virtually nowhere a constraint on business customers. And network slicing is virtually never going to be a “consumer” service. It will be purchased by an enterprise or other organization, in the same way that content delivery network services are purchased by enterprises, not individuals and consumers. 

COAI has to understand that, so ithe comments about network slicing cannot be taken at face value. There is some other agenda.

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.