Throwing Stones When Living in Glass Houses

It is hard to find anybody who argues the Australian National Broadband Network has been a success, after a decade of turmoil. On the other hand, broadband upgrades have presented a difficult business case in many large countries with relatively low density and serious competition. As easy as it might be to criticize apparent failure, the difficulty is not to be underestimated. 

 

Since wholesale networks seem to have worked elsewhere, albeit in smaller countries, it is hard to argue that the wholesale model itself is the issue.

To be sure, high construction costs are a real issue in a country as large as Australia, with so many low-density areas. But many would say the unexpectedly high costs have other causes.

The Australian Communications Commission plans to revamp wholesale pricing. But ACCC believes the NBN--even if changes are made--will not be profitable until 2040. The new plan hopes to recoup accumulated investment losses by that point. 

Some might argue the better course is to amidst failure and allow the equivalent of a bankruptcy. There seems no political appetite for doing so, despite the advantages. For more than 20 years, private connectivity firms that have amassed unworkable levels of debt have been allowed to fail. 

There is much pain for lenders and shareholders when this happens, but successful restructurings that eliminate the debt problem often allow firms to create business models that have a chance of succeeding. 

In other cases firms simply find they are unable to continue, and assets are sold. Many forget that the company once known as AT&T was itself acquired by SBC, which rebranded itself after the acquisition. 

That demise was, in turn, fueled by high debt AT&T took on in an effort to rapidly create a national access strategy based largely on the use of cable TV physical plant. 

The strategy failed, in part because the debt burden was too high; in part because the cost of upgrading the cable TV plant proved too daunting in the timeframe AT&T required. 

AT&T’s big move into cable TV in the mid-1990s came at a time when the long distance provider was seeking a way to reenter the local access business with its own facilities. The thinking at that time was that a largely one-way cable TV plant could be upgraded to become full communications facilities, supporting home broadband and voice. 

Given that development by virtually all cable TV companies in North America and Europe, the thinking was sound. But timing and huge capital investment costs were issues.

On June 24, 1998, AT&T acquired Tele-Communications Inc. for $48 billion, marking a reentry by AT&T into the local access business it had been barred from since 1984. 

Beside TCI, at that point the largest U.S. cable company, AT&T also bought MediaOne, the cable asset holding of US West. 

US West had in 1994 purchased Wometco and GTC cable operations and then Continental Cablevision, creating MediaOne Group. 

US West also participated in a joint venture agreement with Time Warner Cable to form Time Warner Communications (later known as TW Telecom).

In 1993 MediaOne purchased a 26 percent stake in Time Warner's entertainment operations including Warner Bros. and HBO. Those assets also wound up at AT&T. 

AT&T also purchased Teleport Communications Group, a $500-million-a-year local business phone company, for $13.3 billion; MetroNet, a Canadian phone system, for $7 billion; and the IBM Global Network, which carries data traffic, for $5 billion. 

AT&T also signed a joint venture with Time Warner Cable ( to carry phone calls over the entertainment conglomerate's cable TV systems, and with British Telecom to serve multinationals overseas. 

Nor was AT&T the only telco to consider the cable TV strategy. Since 1994, major telcos had been discussing--and making--acquisitions of cable TV assets. In 1992 TCI came close to selling itself to Bell Atlantic, a forerunner of Verizon. Cox Cable in 1994 discussed merging with Southwestern Bell, though the deal was not consummated. 

US West made its first cable TV acquisitions in 1994 as well. In 1995 several major U.S. telcos made acquisitions of fixed wireless companies, hoping to leverage that platform to enter the video entertainment business. Bell Atlantic Corp. and NYNEX Corp. invested $100 million in CAI Wireless Systems.

Pacific Telesis paid $175 million for Cross Country Wireless Cable in Riverside, Calif.; and another $160 to $175 million for MMDS channels owned by Transworld Holdings and Videotron in California and other locations. 

AT&T also made its first investment in DirecTV in 1996, owned and spun off Liberty Media. 

But the debt burden was too high and AT&T reversed course in 2004 and sold most of those assets. AT&T Broadband (the former TCI and US West Broadband assets) were sold to Comcast, making that firm the biggest U.S. cable TV company. 

By 2005 AT&T itself was acquired by SBC Communications, which promptly rebranded itself AT&T. 

The point is that broadband upgrade strategies that might have seemed reasonable at the time often turned out to be unworkable in the time frame required, with the hoped-for costs. Excessive debt almost always was among the chief problems. 

As it turned out, there often was no quick, affordable alternative for telcos looking to create broadband networks that were ubiquitous, capital efficient and timely. 

That “get there fast” mentality remains, as the cost and time to completely revamp the fixed network plant remains an issue. That is why 5G fixed wireless now looms so large. Some believe 5G and future untethered networks will provide further complications to NBN profitability. 

No matter how one looks at the business case, fixed network broadband remains expensive, time consuming, with a difficult business case. It never is surprising that firms look for shortcuts.

The whole argument made by cable operators, in fact, has been that hybrid fiber coax provides a faster, cheaper way of getting to gigabit broadband on a mass scale, compared to fiber to the home. 

Multi-gigabit speeds are coming, so a tough business case will not be getting much easier.

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.