The Lead Product Sold by Access Providers in 10 Years Might Not be Invented Yet

Some might think it is mere hyperbole to argue that connectivity service providers literallly must replace half their current revenue every decade. But that has historically been the norm in the competitive era of connectivity. To use the most-obvious examples, nearly all revenue and profit in the period before 1980 was earned selling voice. Does anybody think that is the case today?

Instead, globally, mobile service is what drives both revenue and revenue growth. On the fixed networks, internet access (home broadband) drives revenue, not voice. In developing markets, mobile subscriptions still drive growth. But in developed markets internet access is the revenue growth driver.

In the enterprise wide area networks market, X.25 once drove revenue, followed by frame relay. ISDN and ATM nver caught on. Now it is dedicated internet access, Ethernet transport or MPLS that are key revenue generators. And MPLS is being replaced by SD-WAN.

The colloquial way of expressing this is to say "my top revenue-producing product in 10 years has not been invented yet." Again, that might seem hyperbolde. But think about 4G, 5G and 6G. Each successive next generation network was introduced 10 years after the prior generation. And each successive generation displaced prior generation customer accounts,

Part of the reason for revenue change of that magnitude is product obsolesence. The other issue is declining average selling prices.

This graph of mobile termination rates--the fee a mobile network charges another network for completing an inbound call--illustrates a couple of principles relevant to the connectivity and computing industries. To the extent that computing costs are driven by chip-level capabilities that double about every 18 months, cost-per-operation drops over time. 

source: iconnectiv 

In other words, the cost of executing a single instruction or operation will fall rather sharply every decade, as they essentially fall by half every two years. In this example of mobile termination rates, costs fell from seven cents per minute to less than two cents per minute over a decade, or more than half--and close to three times--in 10 years. 

All other things being equal--such as holding traffic volumes steady--that means termination revenue would have fallen by close to three times, and clearly more than half, over that decade. In practice, since call volumes rose, the decline was likely less, in absolute terms. 

For example, the global number of mobile subscriptions grew about 52 percent between 2010 and 2019, so there were more people making mobile phone calls. But per-minute charges dropped faster, close to 100 percent lower in some countries. 

Other charges also declined. Between 1997 and 2022, for example, the cost of U.S. mobile 41phone subscriptions dropped by 50 percent. So the actual rate of decline for recurring service was not as fast as the decline of calling costs per minute. 

The actual change in revenue sources was complicated. Revenue was boosted by additional subscribers, replacement services (mobile internet access in place of voice and messaging) and higher possible usage in some cases. But revenue was diminished by lower average unit rates for subscriptions, calls and text messaging. 

That illustrates a second point about revenues in the connectivity business: about half of all current revenue earned by a service provider will be gone, every decade. That might sound like an exaggeration. It is not. How many service providers sell ISDN, X.25, frame relay or ATM anymore? At one time, each of those services was, or was supposed to be, a key driver of wide area network data revenues. 

How many access providers sell dial-up internet access anymore? And, over time, what is the typical downstream package purchased by half of all customers? At one point it might have been 1 Mbps or less. At some point that changed to perhaps 10 Mbps, then 100 Mbps, then higher. The point is that in each generation, the “product” changed. 

International and national  long distance calling rates show the same pattern. 

source: FCC 

source: U.S. Department of Justice 

The general point is that revenue sources changed over that decade, as they tend to do every decade. 

In fact, calling revenues now are minor enough that it is difficult to find statistics on calling volume or revenue, as internet access now drives revenue models. 

The Lesser of Two (Maybe Four) Evils

On*Net Fibra, the Chilean digital infrastructure company 60 percent owned by KKR and 40 percent by Telefonica, is buying rival service provider Entel’s fiber to home network for US$358, and will continue to operate as an open access wholesale network. 

Selling your network might seem the lesser of several evils: capital investment one cannot afford; inability to differentitate services; becoming a commodity or maintaining business moats. Basically, Entel is choosing to reduce capex, the virtue, at the cost of the other evils.

Entel’s FTTH network passes 1.2 million homes and businesses. On*Net Fibra will, after the deal closes, pass 3.9 million premises. The goal is to grow home and business passings to 4.3 million by 2024.

Telefonica had sold “non-core” Central America network assets in 2021, selling 40 percent of its towers business Telxius to KKR in 2017 before agreeing to flip the whole business to American Tower for €7.7 billion in 2021. Entel also sold its data centers to Equinix.  

One has to wonder whether an asset-light business model is emerging in many parts of the connectivity business. In addition to operating as would a mobile virtual network operator, some access providers might choose to specialize, narrow the scope of their services or radically reshape their customer-facing marketing, sales and support processes to achieve lower costs. 

source: EY 

Telcos using public hyperscale cloud computing services instead of managing their own private clouds provides another example of this trend. To a degree once unthinkable, access providers are reshaping, in some instances, their roles as infrastructure owners. 

In part, that is because open access fiber-to-home networks enable operating modes that cost less, while still offering required levels of network performance. The trade off is a loss of pricing flexibility, as retail prices have to reflect the wholesale costs of securing access. 

Since all competitors have the ability to purchase the same services, wholesale customers also lose some amount of ability to differentiate service levels. If every ISP offers symmetrical gigabit per second or multi-gigabit-per-second access, that ceases to be an area where competitive differentiation is possible.

So the bad news for access providers going asset light is that their products might become more commoditized than they are today. The “plus” of lower capital investment is accompanied by the “minus” of higher degrees of commoditization. 

But such trade offs have been happening for a while. Access providers have been selling physical infrastructure assets to raise cash to reduce debt, for example. Were debt not a problem, would they sell? Perhaps not. 

But most access providers struggle with the economics of building the next generations of mobile and fixed networks. Getting out of substantial parts of the digital infra ownership business seems the lesser of several evils.

Verizon Home Broadband Share "In Region" Has Not Moved Much

If Verizon now has seven million fiber access accounts, what does that imply about household penetration rates? It is not so easy to say. For starters, Fios accounts serve small business and larger business accounts, not just homes. 

Verizon homes passed might number 18.6 to 20 million. We must estimate as Verizon never seems to publish a “homes passed” figure. At seven million accounts, Fios would represent 35 percent to 38 percent of homes passed. That seems in line with Verizon’s past reporting, but it is not clear whether business accounts are included in those figures. 

My guess is that business revenue--and therefore the accounts and lines--are reported elsewhere. Given the amount of time Fios has been available, that penetration rate testifies to the amount of competition in the home broadband market, where, by and large, it is cable operators who have 60 percent or higher levels of the installed base, and may have higher market share rates (net new accounts added), at least for most of the past two decades. 

Most other incumbent AT&T executives have speculated that they might ultimately get about half the installed base of accounts. 

Long term, MoffettNathanson sees cable having a 50 percent broadband market share in markets in which they compete with fiber-to-home facilities. That implies a shift of 20 percent of the installed base from current levels: telcos gain 10 points while cable operators lose 10 points of share. 

Not all observers agree with that analysis. S&P Global Market Intelligence, for example, does not expect stepped-up telco FTTH investment to change share statistics very much, in the near term. 

But S&P Global Market Intelligence does believe new competition from mobility suppliers using fixed wireless (T-Mobile, for example) will gain about six percent share of the U.S. residential broadband market with about 7.19 million subscribers. 

It is not yet clear how much of that share gain will be claimed by upstarts in the home broadband market such as T-Mobile, and how much will be gotten by fixed wireless operations conducted by incumbents such as Verizon. 

S&P Global Market Intelligence also estimates there will be about 1.52 million satellite customers by the end of 2021, accounting for just one percent of the installed base of home broadband accounts. 

Many observers expect telcos and independent providers  to gain share. The only issue is how much and how long it takes. Historically, most telcos have found their installed base share tops out at about 40 percent of homes passed.

Are Meetings and Messages Really "Work" or "Outcomes?"

There is some evidence that workers and their managers do not agree on the impact of remote work on productivity. A Microsoft survey of 20,000 people in 11 countries found 87 percent of employees reporting they are more productive remotely or with a mix of in-office and remote work. 

But 85 percent of leaders say hybrid work makes it difficult to determine if their workers are being productive.

We should be clear that nobody has yet developed an accepted and trustworthy way of measuring knowledge worker or office worker productivity. 

So the debate about the productivity of remote work will likely never be fully settled, in large part because it is so difficult, perhaps impossible, to measure knowledge worker or office worker productivity. 

Whether knowledge worker productivity is up, down or flat is almost impossible to say, despite claims one way or the other. Much of the debate rests on subjective reports by remote workers themselves, not “more-objective” measures, assuming one could devise such measures. 

Pearson's Law and the Hawthorne Effect  illustrate the concept that people who know they are being measured will perform better than they would if they are not being measured. 

Pearson's Law states that “when performance is measured, performance improves. When performance is measured and reported back, the rate of improvement accelerates.” In other words, productivity metrics improve when people know they are being measured, and even more when people know the results are reported to managers. 

Performance feedback is similar to the Hawthorne Effect. Increased attention from experimenters tends to boost performance. In the short term, that could lead to an improvement in productivity.

In other words, “what you measure will improve,” at least in the short term. It is impossible to know whether productivity--assuming you can measure it--actually will remain better over time, once the near term tests subside. 

So we are only dealing with opinions: whether those of workers or their managers. People might think they are productive, when they are not. Managers might believe some set of tools allows them to measure such productivity, when they actually cannot. 

Let us be truthful: people like working remotely for all sorts of reasons that have nothing to do with “productivity” in a direct sense. Managers distrust such work modes in part because they lose what they believe to be impressionistic measures of input. 

But input does not matter. Output matters. And “output” is difficult to measure in any knowledge or office work, in ways that correlate well with organizational outputs. 

And by some quantitative measures, remote work might be reducing productivity, using either time spent on communication--whether by messaging or in meetings. Some people act as though sending messages constitutes work, when it might be, at best, a way to coordinate work. 

Some seem to believe that meetings are work, when most meetings are efforts to coordinate work. “Work” happens outside chats, messages or meetings. So if time in meetings or spent communicating increases, that increases the “time spent” denominator for purposes of determining outcomes numerators. 

In other words, if remote work creates a need for vastly-more communication about work, then the effort to produce outcomes from work almost certainly increases, compared to output. Hence, lower productivity.

“Since February 2020, the average Teams user saw a 252 percent increase in their weekly meeting time and the number of weekly meetings has increased 153 percent,” says Microsoft.

The average Teams user sent 32 percent more chats each week in February 2022 compared to March 2020 and that figure continues to climb. Workday span for the average Teams user has increased more than 13 percent (46 minutes) since March 2020, and after-hours and weekend work has grown even more quickly, at 28 percent and 14 percent, respectively.

source: Microsoft 

It might only be one indicator, but vastly-increased time spent on coordination might be a sign that remote work is not as “productive” as remote workers believe, unless the amount of work time increases to compensate. And even there, increasing the denominator, compared to the numerator, always leads to a smaller result: arguably lower productivity.

South Korea Ponders More Fees on Hyperscale App Providers

Though South Korean internet service providers already charge fees on a few hyperscale app providers, the South Korean government is considering new and heavier fees aimed at  a few hyperscale app providers pay for access to South Korean internet access networks, Reuters reports. 

EU regulators and U.S. regulatory officials also are looking at levying such new taxes. Ignore for the moment the obvious winners and potential losers if such policies are adopted. Ignore the industrial policy implications. Ignore the changes to interconnection policies and practices that might also occur. Ignore the complete overturning of network neutrality rules and principles. 

Consider only the issue of who should pay for universal service. Traditionally, customers have paid such fees. The new potential thinking on who should pay for the construction of internet access networks also changes how we think about “who” should pay for universal service. 

Ignore for the moment the wisdom of shifting support burdens from customers of a service to others. Also ignore the potential implications for content freedom or higher potential costs for users of content services. 

For the first time, both European Union and U.S. regulatory officials are considering whether  universal service should be supported by a combination of user and customer fees. The charges would be indirect, rather than direct, in several ways. 

In the past, fees to support access networks in high-cost areas were always based on profits from customers. To be sure, high profits from business services and international long distance voice calls have been the support mechanism. In more recent days, as revenue from that source has kept dropping, support mechanisms have shifted in some markets to flat-fee “per connection” fees. 

But that already seems not to be generating sufficient funds, either, at least in the U.S. market. So in what can only be called a major shift, some regulators are looking at levying fees on some users, who are not actually “customers.” 

Specifically, regulators are looking at fees imposed on a few hyperscale app providers, using the logic that they represent a majority of internet traffic demands on access network providers. Nobody has done so, yet, but the same logic might also be applied to wide area network transport. 

Nobody can be quite sure what new policies might be adopted by hyperscale app providers subjected to such rules. Nobody knows whether virtual private networks might be a way some content providers seek to evade such rules. 

Nobody knows whether users of content, app and transaction networks, advertisers, retail merchants or others  will bear the actual burden of the new costs, but that is entirely likely: somebody other than the hyperscale app providers will wind up paying. 

Many will argue such rules are “fair.” Whether they are, or are not, is debatable. That users of some popular apps, advertisers, retailers or others will find their costs rising is not very contestable.

Ofcom to End Net Neutrality

Ofcom, the U.K. communications regulator, is preparing for a big u-turn on network neutrality, as are regulators in the European Union region and possibly elsewhere. Having concluded that protecting local internet service providers actually is a bigger problem than any supposed anti-competitive behavior on the part of ISPs, regulators now are planning an about face on those rules. 

Some of us might question whether the rules actually addressed a real problem in the first place. Since at least 2014, many observers, and even EU regulators, seemd to sense problems.  

source:: Prosek 

Network neutrality rules, as you recall, were supposed to “protect” app providers from anti-competitive behavior of internet service providers. 

In some markets, such as South Korea and the EU, it now appears regulators are more concerned about protecting local ISPs from a few hyperscale app providers. And that will require overturning network neutrality. 

The proposed new U.K. rules would allow ISPs to offer quality of service features banned by network neutrality rules, such as latency or bandwidth guarantees, traffic-shaping measures to avoid congestion and zero rating of access to some apps. 

Some of us always had issues with consumer network neutrality for precisely the reason that it prevented ISPs from developing differentiated offers that consumers might actually prefer. 

Quality of service for IP voice and videoconferencing apps were among the clearest examples. But gaming app or service also is an area where latency performance might be beneficial. 

If net neutrality goes away, good riddance. It was a solution for a problem that did not exist and prevented innovation in the consumer home broadband business.

AT&T Might Join Ranks of Fiber Joint Venture Firms

Fiber to home cost and time to market, plus the firm’s continuing need to deleverage (reduce debt) seem to have convinced AT&T it is time to take on a joint venture partner to finance new infrastructure. 

And AT&T’s upgrade requirements are fairly daunting. Of roughly 57 million U.S. homes passed, only a bit more than a quarter of locations have been upgraded to fiber access. That means potentially 40 million locations that conceivably could be rebuilt using optical fiber access. 

At roughly $800 just for the network to pass those locations, the capital investment could be close to $33 billion. Additional capital would have to be invested to activate customer locations. At 40 percent take rates, that might imply connecting 16 million locations.

At $600 per customer location, that implies an additional investment of perhaps $9.6 billion. Altogether, AT&T might have to invest about $42.6 billion to activate fiber access for the 40 percent of potential customers presently served by copper-connected home broadband facilities. 

But AT&T does not presently view all those homes passed as candidates for upgrades. 

AT&T’s decision to move into new markets hinges on at least three factors, Chief Executive Officer John Stankey has said. The area has to be undeserved with broadband and be profitable for the company. AT&T also has to be the first provider of  fiber to the home.