Content Businesses Remain Important for Some Connectivity Providers

“Average” is always potentially misleading when discussing any trend related to the internet. To a lesser extent, perhaps, “average” also can be misleading in the connectivity or data center businesses. Everyone can see that traditional linear subscription television is in decline, while streaming services are growing.

But there are big differences in rates of change and direction of change in different markets. The slide is biggest in the U.S. market, but other markets are growing. 

source: Omdia

Also, asset ownership matters. Though most streaming services are owned by third parties, connectivity providers might own those assets in some cases. That makes possible significant revenue growth for connectivity providers who also are asset owners. 

source: Omdia 

But high rates of content investment and pressure on average revenue per account present many of the same financial challenges as faced by connectivity service providers investing in their core businesses: high capital investment and slow growth with often declining ARPU. 

Content no longer seems to be a silver bullet for revenue growth, as once might have been believed three decades ago. And content profit margins have often not matched those of legacy connectivity services, either. Though some content services offered by connectivity providers once had profit margins as high as 40 percent, margins have since dipped towards 10 percent for many, though perhaps remaining as high as 20 percent for the providers with the most scale.

IoT, Private Networks, Edge Computing Will Get the Headlines, Fixed Wireless Will Generate the Cash

It is conceivable that mobile operators globally will make more money providing home broadband using fixed wireless than they will earn from the flashier, trendy new revenue sources such as private networks, edge computing and internet of things. And that might be true even if those other new revenue sources represent vastly more connections, sites or contracts.

source: Ericsson 

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 

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

Consider the U.S. market. By some estimates, U.S. home broadband generates $60 billion to more than $130 billion in annual revenues.

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. 

Do you believe U.S. mobile operators will make more than $14 billion to $24 billion in revenues from edge computing, IoT or private networks?

In fact, do you believe 5G mobility services will drive much revenue increase? The issue is opaque. U.S. mobile operators increasingly are taking the marketing tack of moving customers to higher-priced accounts featuring unlimited usage and then enabling 5G access as a feature of that upgrade.

So is it 5G driving the increase in revenue per account, or is it the upselling of service plans? Some of us would argue it is the latter, not the former. 

The GSMA has argued that fixed wireless would be a key driver of 5G value. 

By way of comparison, low average revenue per device might well mean that even high numbers of sensor connections do not drive especially notable connection revenues for mobile operators. 

Nor might private networks or edge computing revenues be especially important as components of total revenue. It is almost certain that global service provider revenues from multi-access edge computing, for example, will be in the single-digit billions ($ billion) range over the next few years. 

The same is true of forecasts of service provider internet of things revenue. The service provider 4G or 5G private networks revenue stream is likely to be small as well. 

All that implies that 5G fixed wireless might be the most-material--and largest--source of new service revenues for mobile operators. 

Home Broadband Strategy is Heavily Dictated by the Business Model

AT&T is targeting about 30 million homes for new fiber-to-premises availability. Verizon is emphasizing fixed wireless. As always, strategy is based on firm strengths and weaknesses. AT&T has the largest footprint of homes; Verizon’s fixed network possibly reaches 20 percent of U.S. homes. 

Of a total of 140 million homes, AT&T’s landline network passes 62 million. Comcast has (can actually sell service to) about 57 million homes passed.

The Charter Communications network passes about 50 million homes, the number of potential customer locations it can sell to.

Verizon homes passed might number 27 million. Lumen Technologies never reports its homes passed figures, but likely has 20-million or so consumer locations. 

AT&T has more fixed network share to protect, compared to Verizon, while Verizon has bigger upside in taking home broadband share outside its footprint.

The same holds for T-Mobile, which historically had zero percent share of home broadband. 

“If all I had was a wireless network, if I did not have a scaled physical infrastructure fiber thriving and growing network, I might have no other choice than to leverage my wireless spectrum portfolio to go grow my business,” said Jeff McElfresh, AT&T COO.

The point is that business strategy around home broadband platforms is not based strictly on what is "best" long term. Strategy also must be based on how fast competitive home broadband access can be enabled; at what cost and how fast.

Cable operators have differing opinions about whether to upgrade directly to FTTH now, or conduct at least one major hybrid fiber coax upgrade before doing so. Sheer technology performance is but one consideration. The payback model is more important.

In U.S., Home Broadband Competition is Increasing Fast

Here’s one way of looking at the impact of 5G fixed wireless platforms. In study looking at fixed network competition in the U.S. market, the ACA points out that the percentage of markets in which three internet service providers all operate is growing. 

The numerical test ACA uses is “three providers offering service at a minimum of 100 Mbps downstream and 20 Mbps upstream. So consider 5G. 

source: ACA

Looking only at mid-band spectrum--and ignoring areas where millimeter wave spectrum is available and activated, mobile services by AT&T, Verizon and T-Mobile would be added to the list of markets with at least three competitors. If we assume that AT&T or Verizon already are on the list of fixed network competitors, but only one operates in any area,  then at least two new competitors get added to the ACA list. 

In many areas, three new competitors get added, as neither AT&T nor Verizon are already in the market as fixed line providers. That is a huge change, and will happen faster than new fixed-network competitors enter the market. 

source: Opensignal 

Looked at that way, we would expect the percentage of markets with three to six competitors to shoot sharply upwards by December 2021. That ACA data might not reflect this, as ACA only tracks fixed network competitors. 

But functional levels of competition, using the ACA criteria, will skyrocket. We can thank mid-band mobile spectrum for that change.

FTTH the Platform of the Future, "And Always Will Be"

Fiber to the home is a better long-term solution than fixed wireless, most would agree. Of course, it all depends on whether we are looking at pure technology or practical business models.  

It frequently happens that FTTH is not a practical platform for many service providers, for all sorts of reasons. In a study by the Benton Foundation, commissioned by the Communications Workers of America, the 30-year total cost of FTTH ownership often is lower than the 30-year total cost of ownership for fixed wireless. 

source: Benton Foundation 

We can always quibble about the cost assumptions, but the comparisons seem reasonable enough, on a 30-year payback basis. In competitive markets, 30 years is not a meaningful time frame. Companies go out of business and executives are fired if their platform choices take too long to produce actual financial results. 

So the issue is not whether fiber is better on a 30-year time frame, but whether it is workable right now, and for the next decade, for most internet service providers that must make a deployment decision. 

To be sure, multi-user households remain the customers with greatest need for lots of bandwidth, as the report suggests. 

source: Benton Foundation 

But a substantial percentage of U.S. households are not that sort of multi-user case. Some 28 percent are single-person households, for example. About 30 percent are two-person households. 

In other words, even as bandwidth consumption continues to increase, the direction of change for many decades has been towards households that are not “married couples with children,” the prime example of multi-user accounts. 

source: PRB. 

Since 1960, for example, the average number of persons per household has declined. 

source: Statista 

The point is that even with increasing typical bandwidth consumption, FTTH is not the only platform capable of serving a significant percentage of households, with cable modems being the alternative that is most similar to FTTH in terms of capacity. 

source: Benton Foundation 

As always, the business decision about bandwidth is a balancing of end user demand in specific neighborhoods with the cost to upgrade platforms. Also, mobile operators can use their 5G platforms to reach a significant portion of the market that does not have the highest multi-user household requirement, especially when they cannot justify an out-of-territory FTTH build. 

In other cases, incumbent fixed network providers might have to carefully consider the payback when facing cable operators with lower near-term bandwidth upgrade capabilities and strong market share positions. 

As one wag said in the late 1980s: “fiber is the technology of the future, and always will be.” That is a bit of an exaggeration, but still germane.

Right Now, Metaverse is an Idea, as Was the Browser in 1992

The character-based internet evolved in the mid-1990s with the advent of the web browser https://en.wikipedia.org/wiki/Mosaic_(web_browser) and the subsequent development of the World Wide Web, an audio and video capable internet. The web also enabled new revenue models, especially advertising and e-commerce, with new payment models. 

Many would also say the web also ushered in an era of user-generated content (social media). It is the difference between a read-only internet and a read-write internet. 

source: internethistory.org 

In other words, the history of the internet suggests an evolution towards higher realism, greater enhancement of the “real world” and higher amounts of user-created content, with revenue models developing accordingly. 

Basically, those are also changes many believe will happen in the next iteration of the internet, the shift to more-immersive experiences collectively known as the “metaverse.” Keep in mind that the term was first used about three decades ago, about the time that the first browser was created. 

The point is that it might take decades for this next iteration of the internet to be commercially used on a wide basis. As always, the gestation time is far greater than many hope for or expect. 

source: McKinsey 

Key innovations such as packet switching, transmission control protocol/internet protocol, the domain name system, hypertext markup language (HTML) and the uniform resource locator (URL) were among the innovations that propelled the character-based and then visually-based internet. 

Most observers believe artificial intelligence, virtual and enhanced reality, blockchain and cryptocurrencies are important enablers for the coming transformation of experience, along with digital infrastructure changes such as edge computing, lower latency and higher-performance networks. 

The possibility exists that the “metaverse” will have less impact than many expect, in the nearer term. It might, for example, succeed in gaming without changing much existing e-commerce, education, communications or advertising. 

We are about at the place in the past when the idea of a browser was reality. We really could not foresee how the browser would lead to the range of activities, experiences and business models of the web.

40% Annual Data Consumption Increases Produce Exponential Impact on Capacity Needs

If consumer internet data consumption increases 40 percent per year, usage nearly doubles every two years and grows by 500 percent every five years. If a household consumes 435 Gbytes per month, and increases consumption at 40 percent annually, what appears to be linear growth eventually becomes exponential. 

Source: IP Carrier calculation

Even markets with relatively fixed potential, such as mobility service, which is essentially bounded by the number of living human beings, often feature such exponential growth in the early days of adoption of a new mobile next-generation network, for example. 

source: CCS Insight 

When AT&T executives say they expect data consumption to increase by five times in about five years, that is because they expect a 40 percent annual increase in consumption.