Home Broadband is a Market Like Any Other: Segments Exist

One would be hard pressed to name any market where there are not segments such as "value" and "premium;" "youth" versus "mature;" "urban" or "rural;" segments based on consumer values or interests or high-usage versus low-usage.

Many of those segments also exist in the home broadband market, which has at least a few key segments.

Some believe U.S. multi-person households (four people) might require symmetrical 2-Gbps internet access by perhaps 2030. Others believe capacity requirements will be less stringent, with download speeds possibly in the 1.4 Gbps range and upstream only at about 600 Mbps by 2030. 

Such forecasts for home broadband have key implications for capital investment and access strategy choices for suppliers of home broadband services, including architecture choices, the pace of platform upgrades and investment and choices about which customer segments to chase. 

As we are seeing with 5G fixed wireless, for example, networks operating far below what is possible on the most-advanced fixed networks are viable, since some customers will prefer services operating far below the headline speeds possible on all-fiber access networks of the fastest hybrid fiber coax networks, for example. 

That is especially true for single-person households. For telcos (mobile and fixed), cable TV companies and independent internet service providers, the overall principle might be to deploy “fiber to wherever you can make money.”

In other words, platform decisions are a complicated matter based on local competitive pressures capital requirements and expected customer demand. As mobile operators have demonstrated, fixed wireless offering maximum downstream speeds of 200 Mbps or less might appeal to perhaps 20 percent to a quarter of the market, and requires zero access fiber.

Cable operators have shown they can serve most of the home broadband market with hybrid fiber coax that keeps improving, but that a major platform shift is likely once mainstream customers start demanding upstream speeds closer to 0.5 Gbps up to 1 Gbps. 

Coverage and capex requirements, more than speed, are key considerations for most fixed network telcos and independent ISPs relying on fixed network platforms, given the capex requirements and payback models for new fiber-to-home deployments. 

source: Ookla 

But new cost-reducing improvements keep coming. For FTTH installations, for example, the ability to pull fiber directly to the in-home router eliminates the hardware cost and installation time required to activate a new account. 

Study Title	Authors	Year	Methodology	Findings
A Comparative Cost Analysis of Next-Generation PON Architectures for Residential Broadband Access	Hossain et al.	2020	Compared costs of traditional GPON with XG-PON and NG-PON2, including FTTR considerations	FTTR with XG-PON and NG-PON2 showed potential for lower deployment costs compared to traditional GPON with ONTs
FTTH Deployment Scenarios for MDUs: A Cost-Benefit Analysis	Kim et al.	2019	Compared costs and benefits of FTTH deployment options in multi-dwelling units (MDUs)	PON with integrated routers showed potential cost advantages over traditional ONT-based deployments in MDUs
The Economic Feasibility of Fiber-to-the-Premises Access Networks	Sorrentino et al.	2018	Analyzed economic factors impacting FTTH deployments	FTTR solutions and advancements in PON technology could contribute to reduced deployment costs for FTTH

Platform capabilities notwithstanding, home broadband markets likely will always have value and premium segments; high-use and low-use segments. There also will be differentiaion by supplier platforms as well. Satellite might never offer as much bandwidth as a fixed network, but has the advantage of ubiquitous access, which is why smartphone vendors are moving to add satellite access as an "emergency connectivity" feature. 

Fixed wireless might similarly fail to reach fixed network capacity, but also features a lower-cost, faster time to deploy platform that is "good enough" for a substantial portion of the market. 

And mobile phone access might be all some consumers really want to pay for. Headline capabilites do matter, as they increase over time. But not all consumers want to buy the headline service capabilities, and likely never will. 

Fixed Wireless Platforms Make Sense for Rural Markets--Including the U.S.

It might seem obvious that fixed wireless access--though important in many countries where fixed network infrastructure is hard to create and sustain--would also be important in markets such as the United States. 

But fixed wireless grew by about 6.6 percent from the fourth quarter of 2022 to the fourth quarter of 2023, significantly led by  “healthy growth rates in the United States, especially by T-Mobile and Verizon,” say researchers at Point Topic.

source: Point Topic 

“We expect this trend to persist due to demand for connectivity in remote and underserved areas where wired broadband infrastructure is difficult to deploy, and due to some consumers cord-cutting their broadband access services,” Point Topic says. 

What bears repeating is the largely-rural or non-populated character of most of the United States. Most people live on just six percent of the U.S. land surface, according to the USDA. 

And about 94 percent of the land surface is unsettled or lightly populated, including mountains, rangeland, cropland and forests, according to the U.S. Department of Agriculture. 

The result is that fixed networks are expensive across most of the land surface, which is rural, sparsely populated or largely unpopulated. So fixed wireless makes lots of sense.  

The Next U.S. Recession Will Test Resilience of Video, Communications Businesses

Whenever the next U.S. recession happens, we will see whether the many changes in the telecom, cable TV and video streaming markets will change the historic view of how telecom and video entertainment stocks behave during downturns. 

Traditionally, both telecom and cable TV equities have been viewed as resistant to customer defections in recessions as both are “essential” or “important” recurring services. 

But the markets and consumer tastes have been evolving: reliance on mobile phone services and abandonment of fixed network services; substitution or addition of video streaming services and reduced linear video subscription buying; increased importance of internet access and a decrease in importance of voice and linear video services. 

source: Broadband Search, Seeking Alpha 

All of which raises new questions, including the issue of whether streaming services will prove more resistant to customer churn during recessions, compared to linear video. 

Study Title/Author	Findings
"Do Consumers Cut the Cord in a Recession?" by John Beggs and Patrick/2010	Found a slight decrease in cable TV subscriptions, but not a significant decline.
"Telecom Stocks and Economic Downturns" by JPMorgan Chase (Investment Report) /2020	Indicated telecom stocks generally outperform the broader market during downturns.
"The Recession Resilience of Defensive Sectors" by Fidelity Investments (Market Commentary) /2023	Listed telecom as a sector with potential resilience, but noted the importance of specific company financials.
The Recession and Telecom, Deloitte (2009)	Revenue for telecom service providers remained relatively stable during the 2008 recession, but capital expenditures declined.
The U.S. Telecommunications Industry During Economic Downturns, The Brattle Group (2010)	While telecom revenue growth may slow during recessions, it generally holds up better than the broader economy.
Cord Cutting: What Do Past Recessions Tell Us? MoffettNathanson (2020)	Previous recessions saw limited cord-cutting, suggesting cable TV might retain some stability during downturns. However, the study acknowledges the changing media landscape.
Fama & French (1989)	Defensive sectors like telecom and utilities tend to outperform cyclical sectors.
Ang & Timmermann (1993)	Telecom and utilities exhibit lower volatility and higher risk-adjusted returns during recessions.
Blitz & Reichlin (2001)	Telecom and utility stocks are less affected by credit downgrades compared to cyclical sectors.

A recession might accelerate the secular trend of fixed network voice service abandonment, as consumers prefer mobile phone service. Likewise, a recession might also accelerate linear video abandonment rates, considering the relative expense, compared to streaming alternatives. 

To be sure, live sports will be a key issue for a portion of the buying public. Though most observers see a continuing shift of live sports to streaming services, that trend is not as developed, yet. So sports fans might still conclude they have no choice but to keep their linear video subscriptions. 

And that should continue to prop up demand during recessionary periods. 

On the other hand, perhaps a majority of consumers who are not sports fans can buy multiple streaming subscriptions at lower (or near equivalent) prices than they can buy a linear subscription, suggesting the possibility that streaming services could prove more attractive during a recession. 

Also, streaming arguably still is a growth business, while linear video is in decline. Any recession might accelerate such trends. 

source: Ryan Ang, Seeking Alpha 

The most recent recession, caused by the imposition of Covid shutdowns on the economy, might not provide much insight. With the “in person” economy largely shut down in many countries, demand for work from home or learn from home internet access was quite high. 

Take rates and usage of mobility services arguably rose for the same reason. And the value of streaming and even linear TV services arguably was boosted by the lack of other entertainment options. 

So the most-recent major downturns for which we arguably have data would be the 2008 global financial crisis and the 2000 to 2001 dotcom crash, when video streaming was not a mainstream business at scale. 

"Irresistible" AI Storylines Could Prove False

Some storylines seem inevitable and irresistible, either to journalists or screenwriters. And some irresistible storylines are “always wrong.”  

In the past, it has often been argued that the United States was behind, or falling behind, for use of mobile phones, smartphones, text messaging, broadband coverage, fiber to home, broadband speed or broadband price. But the “behind” storyline has proven incorrect, over time. 

To be sure, the U.S. market rarely ranks first on any “adoption or performance” metric, for a variety of reasons related to continental-sized land mass and highly rural density, among other things. 

So elections or industry standing are seen as “horse races.”  Be prepared for many surprises, as we have often seen “early leaders” falter in the computing industry. 

So artificial intelligence is viewed through the lens of a horse race or competition with a winner, a second-place finisher and many losers. So there is a “conventional wisdom” that OpenAI and Microsoft are leading, while others, such as Google, are behind, and a few, such as Apple, are “way behind.” You’d be very hard pressed to find a journalist, a financial analyst or perhaps even some within the generative AI model industry who would dispute the characterization. 

But it might also be worth noting that lots of long-gone firms were “in the lead” in the early days of the personal computer revolution. Many firms started early in the transition from character-based to multimedia web industries faltered, and many fell quickly. 

The point is that major technology transitions tend to be littered with failures, even among firms that seemed to lead, early on. Even in more prosaic industries, such as the use of mobile phones, whole countries often can be viewed as leaders or laggards in terms of consumer adoption. But such “leads” have proven to be quite temporary. 

Still, there is something different about AI. Prior transitions in computing often were led by small startups (some of which later attained scale). The current transition arguably is led by a mix of current computing leaders and some startups. That is quite different.

Is EU "Fair Share" Dead?

European Union "fair share" proposals that would tax a few hyperscale application providers to help fund broadband upgrades by internet service providers remain uncertain. Some expect a finalized proposal by the summer of 2024, but aside from the ISPs themselves and some EU regulators, there seems little support. 

The European Commission held a public consultation on the "fair share" model in October 2023 and a majority of respondents, including academics, some regulators and most stakeholders except the large network operators who proposed the model, expressed opposition. 

In principle, the additional costs could be borne by the app firms (assuming they simply take a hit to their earnings); consumers (who will pay higher subscription fees) or business partners (advertisers, employees, other value chain partners). 

It seems doubtful the affected firms would simply take a financial hit and try and not attempt to recover the costs elsewhere. 

Some might point to South Korea, where the “sending party pays” approach was pioneered for large content suppliers. Withdrawal from the market also remains a possibility, at least for some services and apps less central to affected firm revenues. 

Twitch, the South Korean gaming service owned by Amazon, shut down at the end of 2023 and some observers say costs imposed by South Korea’s “fair share” payments by content providers to internet service providers. 

That is difficult to assess since there is no public information on the payment structure, assumed to be some form of a fee on earned revenues in the South Korea market or traffic volume or both. 

The South Korean "Fair Share" rules, under the Service Stabilization Act, only apply to a specific set of large content providers/ 

The law focuses on the five largest content providers in South Korea, based on daily user numbers and traffic share. As of 2023, these companies include Google; Netflix; Meta (Facebook, Instagram, etc.); Naver (South Korean search engine) and Kakao (South Korean messaging app). 

Those five companies are estimated to represent over 41 percent of all South Korean internet traffic.

The rules apply to firms with a minimum of one million daily users and representing at least one percent of South Korea's total internet traffic.

Small and medium content providers, including startups and individuals, are not subject to these rules. 

Before Twitch, Pandora TV went out of business because they could not afford to pay the network fees, says South Korea’s Open Net. That might not be the case, as Pandora TV suffered with revenue issues and does not appear to be covered by the law.

Connectivity Service Provider Revenue Growth to 2025 is About What You'd Expect

Connectivity provider revenue growth between 2024 and 2025 should be about as most would expect, with a global average of about three percent per year, with slower growth possibly in the one-percent range in North America and Europe, with higher growth in the four percent to 4.5 percent range in Asia-Pacific and Latin America, according to S&P Global Ratings.

source: S&P Global Ratings 

To be sure, executives might wish for faster growth rates, but growth rates in mature markets, especially in industries with “utility-type” characteristics, often are slow. 

Industry	Growth Rate (%)	Source
Telecom	3.2%	Deloitte
Passenger Airlines	7.4%	IATA
Seaborne Goods Transport	3.1%	World Maritime News
Retailing	4.1%	Statista
Retail Consumer Banking	2.7%	PwC
Electricity	4.8%	IEA
Natural Gas	2.1%	IEA
Wastewater Services	3.4%	Global Water Intelligence

Though growth rates in various utility-style industries vary over time, none of these industries are early in their adoption curves, when growth is much faster.

source: Corporate Finance Institute 

As the ILC applies to the connectivity service provider industry, while generally mature, segments within the industry that might be likened to “products” can be at different phases of their life cycles. 

The fixed network voice portion of the industry clearly is declining; the home broadband segment growing. The mobile industry routinely introduced a new generation of mobile services every decade, while sunsetting the older legacy generations as that happens. 

Within the mobile industry, growth is fastest in Asia-Pacific and Latin America; slowest in Europe. 

Industry	2000-2005	2005-2010	2010-2015	2015-2020	2020-2023	Source
Telecom	6.5	4.1	2.8	2.3	3.2	Statista
Electricity	3.8	4.2	3.6	2.4	4.8	IEA
Railroad	4.2	5.1	3.8	2.1	2.7	Statista
Aviation	5.8	5.3	4.2	4.6	7.4	IATA

If one looks at computing devices, “personal computing” clearly has moved through a personal computer stage to a mobile phone stage to a smartphone stage. 

The Economist

At a high level, only fixed network voice is clearly in its “decline” phase. Mobile service is expected to continue replacing its lead platform every decade.

Service	Product Life Cycle Stage	Trends
Fixed Network Telecom Service (e.g., Landlines)	Decline	Facing declining use due to substitution by mobile services and internet communication options (e.g., VoIP).  Limited market growth potential.
Mobile Service	Maturity	Widespread adoption and high market penetration.  Focus on differentiation through network coverage, data plans, and value-added services.  Potential for continued growth in emerging markets.
Home Broadband	Maturity/Growth	High market penetration, particularly in developed economies.  Growth potential in developing economies and through offering higher speeds and bundled services.
Virtual Private Networks (VPNs)	Maturity	Established technology with widespread adoption by businesses.  Potential growth in emerging markets and with increasing security concerns.
Managed Security Services	Growth	Growing demand for cybersecurity expertise and protection against evolving threats.
Data Center Services	Growth	Rising demand for cloud computing and data storage solutions.  Shift from on-premise infrastructure to cloud-based solutions.