Why Revenue per Bit Falls Toward Zero

The fateful decision to build all global telecom networks on internet protocol, creating multipurpose networks, essentially means every network now has to be dimensioned (in terms of capacity) to carry the most-bandwidth intensive, low revenue-per-bit service, namely entertainment video, almost always a service that the access provider does not own, and therefore derives no direct revenue from supplying. And such video now dominates data volume on global networks.

That is but one reason why capacity prices tend, over time, to fall towards zero. Essentially, consumer service business models require low prices. The salient example are internet access services, where the internet service provider does not own the actual video services being watched. 

In the U.S. market, for example, consumers might use 300 Gbytes a month, with monthly revenue being perhaps $50, implying gigabyte revenue of 16 cents, and less if consumption is higher. 

Even if the access provider owns a subscription video service, it has the absolute lowest revenue per bit of any other owned service,  and therefore potential profit per bit, of any traffic type. 

Some might argue that an owned subscription video service has revenue per bit two orders of magnitude (100 times) less than voice, for example, in part because voice and text messaging use such little bandwidth, compared to video.

Text messaging has in the past had the highest revenue per bit, followed by voice services. More recently, as text messaging prices have collapsed, voice probably has the highest revenue per bit.

Subscription video always has had low revenue per bit, in large part because, as a media type, it requires so much bandwidth, while revenue is capped by consumer willingness to pay. Assume the average TV viewer has the screen turned on for five hours a day.

That works out to 150 hours a month. Assume an hour of standard definition video streaming (or broadcasting, in the analog world) consumes about one gigabyte per hour. That represents, for one person, consumption of perhaps 150 Gbytes. Assume overall household consumption of 200 Gbytes, and a monthly data cost of $50 per month.

Bump quality levels up to high definition and one easily can double the bandwidth consumption, up to perhaps 300 GB.  

That suggests a “cost”--to watch 150 hours of video--of about 33 cents per gigabyte, with retail price in the dollars per gigabyte range. 

Voice is something else. Assume a mobile or fixed line account represents about 350 minutes a month of usage. Assume the monthly recurring cost of having voice features on a mobile phone is about $20.

Assume data consumption for 350 minutes (5.8 hours a month) is about 21 MB per hour, or roughly 122 MB per month. That implies revenue of about $164 per consumed gigabyte. 

The point is that implied revenue per bit varies tremendously, even if networks now are sized to handle video, not the other media types. 

Voice and messaging arguably have the highest revenue per bit profiles (perhaps as high as hundreds of dollars per gigabyte). Both are applications sold by the mobile access provider and both consumer very little bandwidth. 

Entertainment video subscriptions sold by access providers do generate app revenue for providers, but relatively little, on a revenue per bit basis, compared to the narrowband voice and messaging services. Lots of bandwidth is required, but revenue is flat rate, so the actual revenue per bit hinges on usage. 

Then there are the “bandwidth” products supporting internet access, where the access provider generally earns zero money from app use, and rings the register only on gigabytes purchased. 

Entertainment video arguably generates cents per gigabyte in subscription revenue. That is a business model problem, as retail prices are in the dollars per gigabyte range. 

Mobile bandwidth  generally costs $5 to $8 per per gigabyte (retail prices), lower than the $9 to $10 it cost in 2016 or so, for popular plans, and less than that for plans containing higher amounts of usage. Higher usage plans might feature costs per gigabyte closer to $3.

The big point is that there is a reason why bandwidth prices tend to fall towards zero: consumer willingness and ability to pay for services and apps using bandwidth is relatively low, and does not change much over time.

Video Turns Business Models Upside Down

If policymakers want new networks to develop as functional substitutes for existing networks, some structural realities will have to be addressed. 

Mobile services already have become functional substitutes for fixed network voice, much Internet access and some portion of entertainment video viewing.

But the future is entertainment video, especially over the top, on demand video. And that sort of entertainment video poses huge problems for any number of wireless and mobile networks.

For starters, video is a media type that places unusual stress on networks, especially wireless networks that have clear bandwidth limitations, compared to modern fixed networks.

Entertainment video also is a media type with very-low revenue per bit characteristics.

In other words, video is expensive to deliver, and yet generates very low--if any--direct revenue for an ISP.

By about 2014, data services generated about 35 percent of mobile service provider revenues while consuming 54 percent of the network resources, according to Nokia (Alcatel-Lucent).

That is based on an analysis of capital investment for incremental Internet access megabytes that in 2009 already had climbed to a range of 6.6 to 35 cents per annual incremental megabyte, or about $6.60 per gigabyte up to as much as $35 per gigabyte. That’s the access provider incremental capex cost.

Subscribers watching a movie on their mobile device at standard definition might consume a gigabyte per hour. For a two-hour movie, that could be as much as 2 GB, for data consumption alone.

High-definition content consumes perhaps 3 GB per hour. In that case, viewing a two-hour movie consumes 6 GB.

Assume a retail mobile data plan cost of about $10 per gigabyte. You see the problem. Viewing a single standard-definition movie “costs” $20 in data usage, in addition to the actual content cost. Watching eight hours a month could cost $80 a month, per device.

Watching eight hours of high-definition TV could cost $240 in mobile data plan charges.

In 2016, U.S. mobile subscribers will spend about 30 minutes a day watching video, or perhaps 15 hours a month.

That implies use of at least 15 GB a month, if all that consumption happened using the mobile network. Obviously that is not the case, as users are shifting most of that viewing to Wi-Fi. In fact, by 2015 about half of all mobile device data was consumed using Wi-Fi.

Still, mobile video in 2015 already represented 55 percent of all viewing, according to Cisco. By 2020, 75 percent of all mobile network traffic will consist of video.

If policymakers want to encourage both innovation and mobile or Wi-Fi platforms as functional substitutes for existing networks, ability to support entertainment video will be necessary.

How that can happen unless zero rating, or very low cost rating happens, is not clear.

source: Cisco

source: Nokia (Alcatel-Lucent)

Fixed Wireless, So Far, is the First Significant New Use Case for 5G

Promoters of every digital next-generation mobile network have promised and hoped for the creation of new use cases and applications. And that arguably has happened, though often not as fast as expected or in the way expected. 

Still, new use cases always have developed with each successive next generation mobile platform. Early in the 5G era, most observers now recognize that 5G fixed wireless has become the first obvious new use case for 5G. 

Most observers believe the internet of things, private networks, edge computing and virtual private networks are likely additional use cases. Opinion is more divided about the use of 5G to support more-immersive applications (gaming, digital twins) and understandably quite divided about whether the full metaverse of persistent, three-dimensional experiences will require 5G, and if so, to what extent and by what date. 

The only clear pattern is higher data consumption. 

Higher data consumption also seems a hallmark of each next generation platform. With the caveat that some of the increase is driven by greater numbers of subscribers, the trend of higher usage has been in place since at least 2005. Still, nobody would contest the argument that users consume more data on faster networks.  

source: Researchgate 

The usage increases have many drivers. As networks get faster, more video content is pushed out, and video is the media type with the highest bandwidth requirements. As networks get faster, people can do more in the same amount of time. So in any X block of time, more data will tend to be consumed. Also, as more content, transactions and activities are available online, more people spend more time interacting online. All of that drives higher data consumption. 

source: Ericsson 

Perhaps significantly, Ericsson’s ConsumerLabsurveys found that 5G users consume more content than do 4G users. They stream more high-definition video, more music, play more multiplayer games, download more HD content and engage in more cloud gaming, for example. Though some might find the use of augmented reality apps at an early stage, Ericsson finds that 5G early adopters use more AR content and apps. 

source: Ericsson 

So 5G is “crossing the chasm,” Ericsson says. The chasm is the big jump in value proposition required for a technology product to appeal to mainstream customers. 

Ericsson’s ConsumerLab research suggests that the adoption process is most advanced in South Korea, among 37 global markets where Ericsson conducted surveys. 

source: Ericsson ConsumerLab 

Ericsson uses segment definitions that intend to capture technology attitudes and willingness to adopt new technology. 

Tech enthusiasts are high-income, well-educated, between 25 and 39 years old, power users of mobile broadband who are driven by new technology, premium devices and rich experiences. They want to be the first people to try 5G and also let the world know about it. However, they are less sensitive to any initial limitations of 5G.

The tech-intrigued are primarily younger students, heavy mobile broadband users, especially heavy on online gaming. Very interested in 5G services which offer diverse types of entertainment content.

Tech pragmatists are middle-age parents, moderate or mainstream users of mobile broadband. They often will need proof of any benefits to 5G before investing. They are interested in 5G services that support them in organizing their work and daily life.

Late tech adopters: Low-income, light users of mobile broadband who are mobile first. They have a rather basic use of online services but are interested in 5G services that enrich connecting with others.

The tech-averse are unemployed, retired, older age group and lower-income users who do not see value in 5G.

Those categories roughly map to similar adoption segments popularized by Professor Geoffrey Moore. 

For most consumer technology products, the chasm gets crossed at about 10 percent household adoption. Moore does not use a household definition, but focuses on individuals. The chasm is crossed at perhaps 15 percent of persons, according to technology theorist Geoffrey Moore. 

source: Medium

Both ways of counting--households for some products, persons for others--are roughly analogous, given household sizes of about 2 to 2.5. The “household versus person” correlations would not work so well in countries where household sizes are larger. 

Perhaps shockingly for an innovation that promises much-faster access speeds, most respondents who plan to adopt 5G indicated that coverage was more important than speed. That would be typical for mainstream users who are less tolerant of product shortcomings. 

Mainstream customers are less interested in “bleeding edge performance” and “just want it to work.” Also note that the next wave of 5G adopters is far less interested in innovative apps, unlike the “tech enthusiasts.” 

source: Ericsson

Taxing Hyperscalers to Fund ISP Networks has Losers, Including End Users

For every public policy decision, there are winners and losers. That is no different for proposals to tax a few hyperscalers to support home broadband networks. ISPs would gain; app providers would lose. Ultimately, so would users of internet-delivered apps and services.

Communications policy almost always is based on precedent and prior conceptions. All this might be relevant when thinking about how public networks are funded, especially not that regulators are looking at unprecedented funding mechanisms, such as levying fees on third parties that are not “customers” of connectivity providers. 

It’s a bit like taxing appliance makers whose products create demand for electricity. Today, the electrical networks are common carriers, all the devices are private and the cost of using electricity is borne by the actual end user customers. 

But some regulators want to essentially tax device manufacturers for the amount of electricity use they generate. 

There are simpler solutions, such as charging customers on a usage basis, based on their consumption. That would have a possible added benefit of not disturbing the data communications regulatory framework. 

And that matters, at least for observers who care about freedom of expression. Data networks have always separated the movement of data from the content of data. Devices and software do not require the permission of the data infra owner to traverse the network, once access rights are paid for. 

The important point is that all networks now are computer networks. 

To be clear, some will argue that changes in how networks are built (architecture, media, protocols) do not matter. It is the function that matters, not the media. If a network is used for broadcast TV or radio, that is the crucial distinction, not whether broadcasting uses analog or digital modulation; particular protocols or radios. 

If a network is a public communications carrier, the types of switches, routers, cables, protocols and software used to operate that business do not matter. What is regulated is the function. 

The function of a public network is to allow paying customers to communicate with each other. Each account is an active node on the network, and pays to become a node (a customer and user of the network). 

Service providers are allowed to set policies that include usage volume and payment for other features. In principle, a connectivity provider may charge some customers more than others based on usage. 

But one element is quite different in the internet era. Connectivity providers have customers, but generally do not own the applications that customers use their networks to interact with. There is no business relationship between the access provider and all the other application providers--as app providers. Every app provider is a customer of a local access provider or many access providers. 

Operators of different domains can charge each other for use of each others’ networks by other networks, which is where the intercarrier settlements function plays. And volume does matter, in that regard. 

The point is that it is the networks who settle up on any discontinuities in traffic exchange. Arbitrage always is possible whenever traffic flows are unequal, and where rules are written in ways that create an arbitrage opportunity. The classic example is a call center, which features lots of inbound traffic, compared to outbound. 

So some might liken video streaming services to a form of arbitrage, in that video streaming creates highly unequal traffic flows: little outgoing traffic and lots incoming, for the consumer of streaming content. 

But that also depends on where the servers delivering the content are located. In principle, traffic flows might well balance out--between connectivity domains-- if streaming customers and server sites are distributed evenly. 

Historically, big networks and small networks also have different dynamics. When the media type is voice, for example, bigger networks will get more inbound traffic from smaller networks, while smaller networks should generate more outbound traffic to the larger networks. 

For streaming and other content, traffic flows on public networks might largely balance, since the biggest content firms build and operate their own private networks to handle the large amount of traffic within any single data center and between data centers. Actual distribution to retail customers (home broadband users of streaming video, for example) likewise is conditioned by the existence of server farms entirely located within a single domain (servers and users are all on one service provider’s network). 

The point is that inter-domain traffic flows, and any compensation that different domains might “owe” each other, is a complicated matter, and arguably should apply only to domains and their traffic exchange. 

In other words, one might argue that traditional inter-carrier settlements, traffic peering and transit are sufficient to accommodate unequal traffic flows between the domains. 

In other words, the argument that internet service providers make that a few hyperscale app providers are sending much more traffic than they are receiving “should” or “could” be settled between the access provider domains, as always has been done. 

If the argument goes beyond that, into notions of broadband cost recovery, then we arguably are dealing with something different. Going beyond inter-carrier settlements, such notions add a new idea, that traffic sources (content providers and streaming services)  should pay for traffic demand generated by their traffic sinks (users and subscribers of streaming services).  

This is a new concept that conceptually is not required. If ISPs claim they cannot afford to build and operate their own access networks, they are free to change charging mechanisms for their own customers. Customers who use more can pay more. It’s simpler, arguably more fair and does not require new layers of business arrangements that conflict with the “permissionless” model.

Data networks (wide area and local area) all are essentially considered private, even when using some public network resources. Data networks using public network resources pay whatever the prevailing tariffs are, and that is that. Entities using data networks do not contribute, beyond that, to the building and operating of the public underlying networks. 

Public transport and access providers might argue that they cannot raise prices, or if they did, would simply drive customers to build their own private networks for WAN transport.

That obviously would not happen often in the access function. Local networks are expensive. But there already exists a mechanism for networks to deal with unequal traffic flows between access domains. 

So there is a clash here between private data networking and public communications models. What is new is that, in the past, the applications supported by the network were entirely owned by the network services provider. 

Now, the assumption is that almost none of the applications used by any ISP’s customers are owned by the ISP itself. So the business model has to be built on an ISP’s own data access customer payments. Application revenue largely does not factor into the business model. 

But that is the way private computer networks work. Cost is incurred to create the network. Revenue might be created when public network access and transport is required. But all those payments are made by an ISP’s local customers, even when the ISP bundles in access to other ISP domains required to construct the private network. 

“Permissionless”  development and operation now is foundational for software design and computing networks. All networks now are computing networks, and all now rely on functional layers. 

The whole design allows changes and innovation at each functional layer without disturbing all the functions of the other layers. What we sometimes forget is that below the physical layer is layer 0, the networks of cables that create the physical pathways to carry data. 

Of course, any connectivity network must operate at several layers: physical, data link and network. By the “transport” layer functions tend to be embedded in edge devices. 

source: Comparitech 

To be sure, connectivity networks--especially access networks that sell home broadband and other connectivity services to businesses--must operate at many layers, including the modems used to support broadband access. 

So some might add, in addition to a “layer zero” network of cables, a layer eight for software and applications that run on networks. 

source: NetworkWalks 

Local area networks typically are less complex, but still use the layers architecture. The difference is that LANs (Wi-Fi, Ethernet  or other) primarily rely on layers one to three of the model. 

source: Electricalfundablog 

“Permissionless” access and transport have sparked enormous innovation. That should remain the case. Additional taxes, which means higher costs, will not help that process. Other networks charge for usage. Public IP networks could do the same. Settlement policies between access domains already exist. And, to be clear, app domains can create facilities that do not cross access domains, if they choose. 

So ISPs can charge for usage if they choose. Unlimited usage could be a higher price. Lower amounts of usage can still be sold in tiers. Problem essentially solved.

If the Future of Video is Mobile," Much Will Have to Change

“The future of video is mobile And the future of mobile is video,” said Tom Keathley, AT&T SVP, releasing news about AT&T’s 5G tests in Austin, Texas. That assertion might  be true at multiple levels, beyond the observation that video already drives capacity demand on mobile networks.

In fact, it always has been clear that on-demand video would “break” the economics of a traditional video service, when the mobile network charges for data usage. The reason is simply that traditional video services do not charge for use of networks (the cost of the network is part of the content subscription). In other words, media business models always were based on zero rating.  

So long as mobile networks charge both for content and access, consumption of video will face hurdles, and consumption of next-generation versions of linear video services will face impossibly-high barriers. By about 2022, video will drive 75 percent of all mobile usage, some predict.  

At least in the medium term, video is the biggest new revenue source in the mobile business. Already, peak hour data demand is driven by entertainment video, which represents about half of all demand at peak hours of use.

Ultimately, mobile likely will change the way subscription video applications are regulated when carried on mobile networks. The analogies are mobile voice and messaging, where consumers pay for use of those features, but not the underlying bandwidth to support the usage.

Up to this point, that has not been the way subscription video services are charged, on fixed or mobile networks. Until now, consumers paid both for consumed data and the content subscription.

That actually is a barrier to widespread adoption of mobile subscription video, as significantly higher data charges would be an inevitable result.

The T-Mobile US “Binge On” program, which allows customers to view nearly all video without incurring data usage charges, was the first effort to encourage a new model by exempting usage charges for bandwidth-intensive video apps.

AT&T’s DirecTV Now is the next-generation replacement for linear DirecTV. But DirecTV has a different business model from over the top apps, in one key sense. DirecTV, and cable TV or telco TV, is a managed service, bundling an access network for delivery and quality of service mechanisms, with the actual “product” being the content, not the use of the network.

Traditionally, satellite TV and cable TV have been regulated differently than telco access networks, on a modified broadcast TV basis. Telco access networks have been regulated as common carrier utilities, although for most of its existence, internet access was not regulated as a common carrier service (that changed under the Obama administration, but is subject to change).

As virtually all media types now can be delivered over an IP infrastructure (public or private), the big problem to be addressed is how to modernize and rationalize regulation of all the various apps and services, which have ranged from unregulated (print media) to somewhat regulated (broadcast TV and radio; cable TV apps and access) to common carrier (telcos and cable, to a certain extent).

When every media type can use one physical infrastructure, different sets of regulatory frameworks--treating different providers in different ways; or the same apps in different ways based on which physical infrastructure is used--will make little sense. Zero rating is allowed for newspapers and magazines, broadcast TV and radio, cable TV and other linear distribution services, but not for IP network delivery, even when it is the same content.

Old Regulatory Silos Do Not Work

Mobile video traffic is forecast to grow by around 50 percent annually through 2022 to account for nearly 75 percent of all mobile data traffic by that point.

Social networking is expected to grow by 39 percent annually over the next six years. However, its relative share of traffic will decline from 15 percent in 2016 to around 10 percent in 2022. Other application categories have annual growth rates ranging from 19 to 34 percent, so are shrinking as a proportion of overall traffic.

To be sure, not all the video is driven by subscription video. Embedded video in social media and web pages continues to grow. But subscription video will be the single biggest eventual driver of bandwidth consumption, as watching an hour of Netflix TV or movies might consume between 1 GB and 3 GB per hour.

The growing dominance of video traffic on internet access networks of all types raises some questions beyond the sheer amount of data to be carried.

Some three decades ago, it would have been common to hear observers talking about convergence, whereby all media types--from voice to messaging; print content to video and music--would be conveyed to consumers using a single, integrated access platform. We do not use the term much, anymore, because it simply is the way communications and content are used or consumed using internet mechanisms.

In 1983, Professor Ithiel de Sola Pool said:

“Separate nations will have separate networks, as they do now, but these will interconnect. Within nations, the satellite carriers, microwave carriers, and local carriers may be—and in the United States almost certainly will be—in the hands of separate organizations, but they will interconnect. So even the basic physical network will be a network of networks. And on top of the physical networks will be a pyramid of service networks. Through them will be published or delivered to the public a variety of things: movies, music, money, education, news, meetings, scientific data, manuscripts, petitions, and editorials.”

De Sola Pool correctly identified several fundamental features of the coming “next generation network:” that it would separate logical and physical networking, becoming a network of networks; and that all media types would be accessible from one physical platform. That might seem unremarkable. That is not the case.

Recall that the IBM PC had been introduced in 1981 and that the Ethernet networking standard was released in 1983. In 1984, home computer ownership might have been about 10 percent and about 1.4 percent used the internet--using dial-up modems. There was no World Wide Web. In other words, the shape of the world to come was anything but clear.

More important than the identification of the technology developments, de Sola Pool grasped the implications for regulation.

“In the coming era, the industries of print and the industries of telecommunications will no longer be kept apart by a fundamental difference in their technologies.”

Keep in mind the traditional regulation of various media types. Print content is essentially unregulated. Cable TV is lightly regulated. Broadcast TV and radio are more regulated. Voice and messaging are heavily regulated using a utility model.

All that becomes problematic in an era where all those media types can be--and are--internet or IP apps, and when apps mix and mingle all those media types, and when any type of company can compete in another segment’s business. In that scenario, old regulatory frameworks simply do not work very effectively. Some contestants face constraints their competitors do not.

Telcos have mandatory wholesale obligations and sometimes price controls; cable TV companies do not. Some app providers have universal service obligations; others do not. Some app and access suppliers are constrained where it comes to retail pricing and packaging (zero rating), while others are not.

Some apps and services are covered by content rules, others are not.

The point is that the coming shift to on-demand content delivery is going to stress regulatory models and notions of fairness. Traditionally, “media” firms are free of content and other rules related to their business models. Cable TV firms essentially are free to set their own prices and packaging policies. Some telcos remain highly or substantially regulated in that regard.

But nearly all larger contestants in internet content markets now are “media” companies to some significant extent, and moving more in that direction.

That is going to keep exposing irrationalities in the legacy regulatory structure. The internet is used by “everything.” But not everything using the internet and IP actually has been historically regulated (or not regulated) as a “data” app.

There are multiple frameworks to resolve.

source: Ericsson