Service "to Persons" has Key Revenue Implications, Compared to Service "to a Location"

For anyone who has covered or analyzed the U.S. connectivity business for some decades, it now is somewhat shocking how much revenue is produced by the mobility business, compared to the fixed networks business, even granting the importance of the fixed network for business and home broadband. 

Keep in mind one salient element of each business: fixed services are “to a location” while mobile services are “to a person” or “to a sensor.” So revenue per locations is one number while mobile revenue is a compound number based on the humans and network-connected sensors at a given location, 

In other words, mobile revenue can easily be 2.5 to 5 times the revenue of a fixed network connection. 

AT&T mobility average revenue per postpaid account was $55.43 in the fourth quarter of 2023, while home broadband accounts served by optical fiber had $64.82 average revenue per account. 

So you can see the total revenue per account implications when multiple mobile accounts are purchased, compared to a single home broadband connection. 

AT&T, for example, earned $31.3 billion in the fourth quarter of 2022. Mobility generated $21.5 billion of that amount. The fixed networks business generated $8.8 billion. In other words, mobility drove nearly 69 percent of total revenue. 

source: AT&T

The fixed networks business revenue was $5.6 billion, or about 18 percent of revenue, while consumer fixed network revenues represented about 10 percent of total revenue. As important as the fiber-to-home business is, it is responsible for less than 10 percent of AT&T revenues, as voice revenues and copper access are part of those revenues. 

 

 

source: AT&T

Of course, each product has different profit margins, so revenue does not tell the whole story. Business service, consumer broadband (fiber versus copper) and consumer and business mobility all likely have distinct profit margins. 

So smaller revenue contributions might generate higher amounts of firm profit. Still, the law of large numbers is evident. A one-percent improvement in mobility segment revenues or profit should have higher firm impact than a similar one-percent increase in either business or consumer fixed network services. 

Home broadband probably has the highest margins, and those margins might be getting better. Because of federal government subsidies for fiber-to-home construction. Those subsidies might reduce the cost of FTTH builds by 20 percent, in rural and other difficult-to-serve areas. 

We Used to be Able to Count Trans-Atlantic bandwidth in T1s

Back in 1979 when the PTC was formed, trans-Atantic bandwidth was about 1,000 Mbps total, or about 647 T1 circuits. In early 2023 trans-Atlantic capacity is likely above 75 Tbps. 

source: AI Impacts

Sometimes One Has to Stop and Remember How Much Things Have Changed

When PTC was founded in 1979, there was no internet. The Apple II had barely been commercialized. The IBM PC did not exist. Globally, about 4/100 of one percent of humans used a cell phone. We did not text, we called--from a phone connected to the wall. 

There was no World Wide Web, home broadband or consumer GPS. There was no social media, no video or audio streaming. We did not use email. 

Ethernet was not yet commercialized. It did not become a standard until four years later. 

In the U.S. market, consumers could not legally attach their own phone or modem to the network: it was illegal. Phone service was a monopoly. Only one firm could be in that business. 

The amount of bandwidth linking North America and Europe could be measured in T1 circuits. 

So yes, much has changed. 

Nomenclature Change Shows Business Change

Private equity firms say they invest in fiber to premises providers instead of “telcos.” That is the key to understanding the restructuring opportunity they see.

Access providers don’t want to be known as “telcos” anymore. They don’t want to be known as “cable TV” companies, either. Instead, they are internet service providers, or home broadband providers. That trend has been nearly two decades in the making and tells us much about how the business has changed. 

But the very fact that private equity firms invest in digital infrastructure also tells us some other possible things about the business.  

Historically, the private equity business model requires acquiring assets that can be transformed in some way to add value. Sale of those assets is the exit. That might imply there is a “problem” of some type with the asset that PE can fix, before flipping the asset. 

 Institutional investors are the other group that traditionally buys real estate type assets ranging from hotels to airports and toll roads to gas pipelines and electrical utilities. They are more interested in predictable cash flow generated from slow-growth assets with some degree of natural advantage in the form of business moats that protect them from competition. 

The issue that we might contemplate is what the new interest in digital infra assets indicates about business models. Some PE investments are vertical: airport operation, gas pipeline operations, toll road operations and produced cash flow are the value. The physical assets underpin operations. 

In other cases, the model is more horizontal. The value of a wholesale broadband access network is the ability to lease access to the network, rather than operating the retail business to generate cash flow. 

The analogy in the classic real estate business is the “asset light” model used by some hotel, hospitality or entertainment businesses where the retail business operates without land ownership, sometimes without building ownership, sometimes without indigenous management or branding. 

So the issue is how far similar concepts can be applied within the connectivity industry. Everyone is familiar with the “asset light” mobile virtual network operator model in the mobile industry. 

Fixed network operators are moving, in parts of their businesses, in that direction, at least in the form of joint ventures that share ownership of access network assets. 

Up to a point, hyperscale app providers have moved vertically, to integrate transport functions (wide area networks). Google Fiber is an example of full vertical integration, in some ways. So are hyperscale data centers. 

Just how far the fixed network unbundling can go is a question, as is the degree of vertical integration by hyperscalers. 

Bill Barney, PTC Chair on 2023

Marketing Claims Aside, How Much Capacity Do Home Broadband Users Really Need?

How much internet access speed or usage allowance does a customer really need? It actually is hard to say. U.S. data suggests there are clearer answers about what customers expect to pay, which is about $50 a month, on average, even if some studies suggest wildly higher prices.  

source: Broadband Now 

Average prices are lower or higher than $50 a month, depending on what adjustments are made, such as adjusting for currency differences or cost of living differences between markets. Adjustments of that sort tend to show rather uniform global pricing of internet access, also adjusting for “quality” (speed, for example) differences. 

Also, any assessment should be based on service plans people actually buy, not posted retail prices for any particular tier of service. Bundle pricing adds another layer of complication. 

Internet service provider business models always require matching supply with demand; deployment speed and cost. What is needed to market effectively against competitors also matters. 

Time to market does matter. “It took us 22 years to pass 17 million households with fiber: 22 years,” says Hans Vestberg, Verizon CEO. “That’s how hard it is.”

“We basically had 30 million households covered with fixed wireless access in less than one year,” he also notes. 

So there is the trade off: rapid deployment of a lower-cost network versus slower deployment of a higher capacity network; wide coverage now versus higher capacity later; lower capital investment versus high. 

As typically is the case, wireless platforms can be provisioned faster than cabled networks, at lower cost. The Verizon data illustrates that fact. 

Cost also matters, as no internet service provider--especially those in competitive markets--can afford to spend unlimited sums on its infrastructure. Verizon and T-Mobile tout fixed wireless access in large part because they can afford to supply itt and can supply it fast, at lower costs than building fiber-to-home would cost. 

But marketing also matters: internet service providers do compete on the basis of speeds and feeds; do compete on price; do compete on perceptions of quality; terms and conditions and value. 

In that regard, even as home broadband speeds continue to rise, marketing claims are a battleground. Cable executives, for example, make light of fixed wireless as they claim it will not scale the way hybrid fiber coax and fiber-to-home can. FWA proponents argue that the platform does not have to scale as fast as FTTH or HFC to provide value for segments of the customer base. 

For example, even households that buy the fastest tiers of service rarely have a “need” for all that capacity. According to a survey by HighSpeedInternet.com, survey respondents say the “perfect plan” features a “610 Mbps fiber connection for $49 per month.”

In the third quarter of 2022, about 15 percent of U.S. households bought service operating at 1 Gbps, while 55 percent purchased service running from 200 Mbps to 400 Mbps. 

source: OpenVault 

 

The point is that, no matter what they tell researchers, U.S. home broadband customers do not seem especially eager to buy gigabit services at the moment, or services running at about half that speed. 

Speed demands will keep climbing, of course. But it does not appear, based on history, that most consumers will switch to buying the fastest tiers of service, or the lowest tiers of service, either. Historically, U.S. consumers have purchased internet access costing about $50 a month, with performance “good enough” to satisfy needs.

In fact, one might make the argument that is consumption (gigabytes consumed) that matters more than speed. Average data consumption stood at about 500 gigabytes per month in the third quarter of 2022, according to OpenVault. But the percentage of power users consuming a terabyte or more was growing fast: up about 18 percent, year over year, and representing about 14 percent of customer accounts. 

So speed claims are about marketing, as much as customer requirements. “It's turned into really a marketing game,” adds Kyle Malady, Verizon Communications EVP. ISPs compete on claimed speeds, even if there is little evidence most households require gigabit speeds at the moment. 

Beyond a certain point of provisioned capacity per user and device in any household, additional speed brings subtle if any benefits. Consumption allowances do matter, especially for households that rely on streaming for video entertainment. 

Nobody can give you a convincing answer why gigabit per second or multi-gigabit per second networks are required, beyond noting that multi-user and multi-device households need a certain amount of capacity if all are using the ISP connection at the same time. 

No single application, for any single user and device, requires a gigabit connection. So the real math is how much total bandwidth, at any moment, is needed to support the expected number of users, apps and devices in simultaneous use. 

For a single user or two, using one or two devices each, simultaneously, it is hard to see how a gigabit or faster connection is required. 

Some version of that argument--that a customer “does not need” a particular capability, is at the heart of much ISP marketing. ISPs whose platforms have some speed limitations point out that the limits do not matter for some customers, or that the price paid for higher-speed services does not provide value, commensurate with cost.

Communications Regulation Has Obvious Implications for Political Freedom

Communications regulators generally argue--essentially--that “if it walks like a duck, and talks like a duck, it is a duck” when applying policy frameworks to different kinds of communication networks (general purpose public networks; broadcast TV and radio; satellite; cable TV and data networks, for example). 

In other regards, irrespective of technology, protocol or architecture, public networks are regulated one way; other networks often in different ways. Private local area networks such as Wi-Fi have few, if any restrictions beyond power emission limits.  Wide area networks likewise have few, if any, limits.

Data networks are not regulated, or lightly regulated, if at all. The internet seems to exist in a different space, as governments retain the ability to block access, block apps or services if they choose. 

In that regard, the internet is somewhat less regulated than public communications for phones, PCs and other devices, but more regulated than enterprise WANs or other local area private networks. 

Advocates for content freedom and governments often stand apart where it comes to internet regulation. But most of the movement over the last 20 years has been in the direction of “more regulation.” VoIP services increasingly have become regulated just like older forms of voice using the public switched telephone network, for example. 

Private actors often are free to impose their own restrictions as well. And the direction there also has been towards less freedom. 

So “technology is not destiny.” Regulators are free to make their decisions any way they choose. 

Still, all networks these days now are computer networks, even if the manner of use can be different. Broadcast TV, broadcast radio, mobile networks, satellite networks, low power wide area networks and emergency networks, for example, often combine the right to use spectrum with a purpose-built network. 

Quite often, the applications supported by the network are vertically integrated, and the licensee controls who and what gets access to the network. In other cases, use of the network requires authorization (you are a customer of a mobile or satellite network and pay for access,  for example). 

The internet--and internet-based applications--do not operate that way. Each application can set its own access rules for customers and users. 

Oddly enough, highly-regulated networks such as the "phone network" and other public networks have historically not interferred with content, and are, in that sense, about as permissive as are data networks or other media such as newspapers and magazines, in some countries.

Content regulation has at times been more stringent, at times less stringent,  for broadcast TV, radio or cable TV networks. 

Again, oddly enough, it now appears as though private actors are suppressing freedom as much, if not more than governments. Rarely are content regulations imposed by governments as much as they are by private firms. 

The point is that regulators have discretion and choice. So do private actors who use communicatiions. They can make decisions that promote more or less freedom, in almost any sphere where data networks operate. Perhaps it is worth pointing out that societies and people might gain from more freedom, rather than less.