IT Spending Grows Slowly, But Value Arguably is Quite a Bit Higher Than Spending Suggests

In a business where efficiencies are being reaped, traditional spending metrics have to be interpreted. Traditionally, higher spending on information technology was interpreted as a sign of growth, while spending declines were seen as signs buyers were slowing investments.

That is less true, now, as open source and other sources of efficiency (white label gear, resource sharing) also are at work. In other words, compared to a decade or two ago, computing capability costs as much as an order of magnitude less than it used to. In other words, enterprises can achieve their goals at lower cost, in some cases far lower cost.

Worldwide information technology spending is forecast at $3.5 trillion in 2017, a 1.4 percent increase from 2016, according to Gartner. This growth rate is down from the previous quarter's forecast of 2.7 percent, due in part to currency issues (U.S. dollar strength).

The data center system segment is expected to grow 0.3 percent in 2017. While this is up from negative growth in 2016, the segment is experiencing a slowdown in the server market.

Enterprises are moving away from buying servers from the traditional vendors and instead renting server power in the cloud from companies such as Amazon, Google and Microsoft. This has created a reduction in spending on servers which is impacting the overall data center system segment."

Worldwide IT Spending Forecast (Billions of U.S. Dollars)
	2016	Growth (%)	2017	2017 Growth (%)	2018 Spending	2018 Growth (%)
Data Center Systems	171	-0.1	171	0.3	173	1.2
Enterprise Software	332	5.9	351	5.5	376	7.1
Devices	634	-2.6	645	1.7	656	1.7
IT Services	897	3.6	917	2.3	961	4.7
Communications Services	1,380	-1.4	1,376	-0.3	1,394	1.3
Overall IT	3,414	0.4	3,460	1.4	3,559	2.9

source: Gartner

Can You Build a Business Model on Internet Access Speed?

Can a service provider build a 5G business model on speed? Some might say the answer is “no.” In fact, that likely is the majority opinion at this point. In fact, that is why 5G is seen as the first mobile network that might build revenue substantially beyond services to people who want to talk, text or use the internet.

On the other hand, there are some potentially important revenue segments where 5G speed might be precisely the foundation for a business model of some size. We might take as a given that speed alone will not provide a sustainable advantage within the mobile ecosystem, as all leading providers will adopt the standard.

But that same improvement in speed (up to gigabits per second) will open up a significant opportunity in the wireless substitution market that already has seen mobility become the preferred method of using voice services.

Some idea of the potential market share shift can be seen in the fixed network internet access business in the United States, where distinct platforms operated by telcos and cable TV operators have vastly-different “typical speed” profiles, with serious consequences for market share.

Leichtman Research Group, studying the 14 largest cable and telephone providers in the United States, says the top cable companies netted 122 percent of the broadband additions in 2016 -- compared to 106 percent in 2015, and 89 percent in 2014.

In other words, since 2015, cable companies have gained all the net growth  in the market, after taking most of the market in 2014.

The reason for that shift is “speed,” namely the ability of cable operators to dramatically boost speed, compared to telcos, fast and at reasonable cost. That trend began in 2006, when cable operators began to deploy their new DOCSIS platforms at a time when fiber-to-home deployments on the telco side were restrained.

source: FCC

So it is possible to build a business model on “speed,” but only when key competitors cannot match the faster speeds. That likely will not be the case within the 5G mobile markets, but could be an issue in the fixed access markets, where mobile services might for the first time be competitive with cable offers.

That could have market share and business model implications. Telcos might be able to compete more effectively with cable, principally by closing the speed gap. Also, for some tier-one mobile operators, the addressble market grows substantially.

Today, Verizon and AT&T have fixed networks that cover only a portion of total U.S. homes. Using the 5G network, they will be able to compete nearly nationwide. That is a big deal.

Telcos might find they do not have to spend so much capital to upgrade their networks in their existing footprints.

On the other hand, telco fixed networks will face even greater financial pressures, as mobile and wireless become better alternatives almost immediately.

AT&T Acquires 735 Millimeter Wave Licenses in Top-40 U.S. Markets

AT&T is acquiring Straight Path Communications, a holder of spectrum licenses in the 28 GHz and 39 GHz region. The deal means AT&T will acquire 735 licenses in the 39 GHz band and 133 licenses in the 28 GHz band. These licenses cover the entire United States, including all of the top 40 markets, to support the coming 5G network.

That move is but the latest in a series of developments indicating that millimeter wave spectrum and small cells will be foundational for coming 5G networks. Previously, AT&T had acquired 24 GHz and 39 GHz bands covering 8.4 billion MHz POPs as part of AT&T’s acquisition of FiberNet.

Dish Network, for its part, acquired from sister company EchoStar spectrum licenses covering four markets in the 28 GHz band. THat move adds more spectrum to the trove Dish Network has amassed, either to build its own mobile or wireless network, or as an asset to be sold.

Verizon, for its part, as part of its acquisition of XO Communications, gained

102 licenses in the 28 GHz and 39 GHz bands, covering 188 billion MHz­-POPs, or 23 times the FiberTower assets.

Separately, Charter Communications has applied to the Federal Communications Commission to test 28 GHz frequencies.

So Far, the HBO Model Leads OTT Subscription Video

It might be less than fully accurate to characterize over the top streaming services as being “like HBO” in emphasizing pre-recorded content or “like Sling or DirecTV Now” in focusing on live network streaming. Still, there are differences. Netflix long has been viewed by many as a functional substitute for HBO, while Sling has been viewed as a way of streaming TV networks.

In that regard, Netflix users average 28 hours of monthly viewing time, while Sling TV customers watch 47 viewing hours per month. To be sure, the lines are not impermeable, as Netflix and Amazon Prime, for example, create a growing amount of original series content.

Still, as Sling customers are seen as substituting OTT for linear TV subscriptions, you see the pattern. There is a difference between live streaming of networks and access to archival or other pre-recorded content.

The analogy is to sports or news content, which provide the highest value as “live” formats (even if the news category is lightly viewed in many age segments). That behavior suggests there are at least two big segments of the OTT business: the HBO style service and a replacement for “live” TV.

YouTube represents the third major segment: user-generated video, with a distinct revenue model mostly based on advertising, not a combination of advertising and user fees (subscriptions), at least for the most part, as YouTube also has moved closer to supplying a subscription TV service.

source: ComScore

Value of Dense Backhaul and Cost of Stranded Assets Now Define Fixed Network Business Model

It is a bit of an exaggeration to say that backhaul is the purpose of a fixed network. After all, as many generations of engineers have been trained, “access” is the purpose of a fixed network, allowing customers to use the apps and features of the core network.

On the other hand, one often hears app providers called “edge providers,”defined by the Federal Communications Commission as “any individual or entity that provides any content, application or service over the Internet, and any individual or entity that provides a device used for accessing any content, application, or service over the Internet.”

That is going to strike some of you--rightly--as being excessively broad. If all users and app, content or service providers are “edge providers,” then the concept has almost no meaning, as there are virtually no instances of any entity connected to the internet other than edge providers.

In other words, our language now suggests “everything” is “edge,” and nothing is “core.” That is wrong at the physical level, and also a topsy turvy inversion of networking elements.

So the first objection to the notion of “edge provider” is that it refers to “everyone” and “everything” connected to an IP network or the internet. In a broad sense, the “role” of a consumer, the role of a content or app provider and the role of an “internet access provider” remain distinct.

Big hyperscale data centers, central offices, private and public servers operated and used by enterprises, content, app and service providers are one thing. End users are another, and the networks that connect users are different from each of those categories.

Still, in a functional sense, whatever we choose to call the facilities called the “access network,” those facilities functionally provide backhaul (or “fronthaul,” services): cell tower to switching center; radios to controllers; phones to switches or servers; PCs to servers; sensors to servers.

Functionally, it is all backhaul, even if, technically, backhaul connects the mobile network to the wired network, while fronthaul connects radios with controllers. In other words, all access is backhaul.

That is especially true now that most human being get “access” to servers and switches from a mobile device connected to cellular network radios or a Wi-Fi router. For a telecom or network engineer, “access” is a specific part of the wired network, distinct from the “distribution” or “trunking” network and the “transport” or wide area network.

In a different functional sense, access is the radio link between a device and the wired network. But the last few miles of the wired network represent as much as 80 percent of all network investment.

That has huge implications in facilities-based competitive markets, as stranded fixed network assets become a key part of the business model. “Stranded assets” are “access lines” which have no paying customers on them. In facilities-based competitive markets such as the United States, that means no single supplier typically has a paying customer on more than 40 percent of deployed facilities.

Put another way, up to 60 percent of the invested access network capital is “stranded.”

On the other hand, fixed access assets used for backhaul become more important, as small cell architectures place a premium on dense backhaul networks. So it is a safe prediction that, in coming years, the value of fixed networks will be a contest between the cost of stranded assets and the value of dense backhaul assets.

Telco Voice Stranded Assets Now About Half of all Locations

Stranded assets are a growing business model issue for large tier-one service providers. Consider that, between 2012 and 2015, U.S. fixed network switched voice connections dropped from 96 million to 64.6 million, a decline of 33 percent in just three years.

Of course, some additional lines were supplied by telcos, using voice over internet protocol platforms, so the extent of the voice services loss is less than appears, looking only at switched line loss.

The point is that nearly half of the total voice market now is supplied by attacking service providers, not telcos.

In other words, a fixed network built to serve “everyone” is used by about half of homes passed. That means the cost to serve each customer is twice as much as it used to be, as customers wind up paying for network investment that is stranded, and does not generate revenue.

Assume there are about 126 million U.S. households, about 98 percent of which are passed by a telco network. That implies some 123.5 million locations, of which perhaps 53 percent buy voice service.

That means the whole telco voice network derives revenue from about 65 million homes, or perhaps 52 percent of locations. And the problem seems to be getting worse, as consumers seem to be buying fewer telco fixed voice lines every year. For the market as a whole, that is offset by consumers buying cable TV fixed voice services, but even cable operators now are losing voice accounts.

source: FCC

For most of us, the idea that voice was a product like any other was unthinkable prior to the mid-1990s, for one simple reason: accounts and usage had risen steadily for more than a hundred years. And when use of primary lines seemed saturated, people started buying second lines. At first it might have been for use by teenagers in a household. Then demand for dial-up internet access happened. The point is that usage seemed only to move in one direction: up.

In the U.S. market, that cracked in either 2000 or 2001, depending on which data sources one looks at.

source: FCC

Global fixed access lines might have peaked about the same time. In the U.S. market, minutes of use peaked in 2000.

source: FCC

These days, nearly half of U.S.  homes (47.4 percent) had only mobile phones during the first half of 2015. At the present rate of change, sometime in 2017 it is likely that at least half of all U.S. homes will not have a fixed line telephone service.  

Also, more than 66 percent of all U.S. adults aged 25 to 34 and of adults renting their homes were living in mobile-only households.

source: CDC

source: CDC

Those are clear examples of product substitution and product lifecycles. People decided to use fixed telephony less, and mobile telephony more. Text messaging for a while was the big driver of incremental revenue in the mobile business, but that now has passed its peak, to be followed by mobile internet access as the growth driver.

Those are some of the changes we have seen over the past several decades.

Three Decades of Disruption
1980	2015
Natural monopoly	Oligopoly
High margin	Moderate to low margin
Low to moderate adoption	High adoption
Low innovation	High innovation
Stable markets	Unstable markets
Compete on quality	Compete on price
Fixed network dominates	Mobile network dominates
Tightly integrated apps and network	Open network
Owned app creation	3rd-party app creation
Sell app, use network access	Sell network access (dumb pipe)
Voice business model	Internet access, mobile business model
Similar business models globally	Growing diversity of business models
99.999% uptime	99.9% or “good enough” availability
Few lead apps	Many lead apps
IT adoption: enterprise; SMB; consumer	IT adoption: consumer/SMB to enterprise

source: IP Carrier

Changes in U.S. Net Neutrality Coming

As expected, the new chairman of the U.S. Federal Communications Commission will roll back or modify some elements of the current network neutrality rules, while shifting some enforcement to the Federal Trade Commission, while retaining the original sense of the “Internet freedoms” principles of earlier rules that emphasized the right to use all lawful apps, without blocking.

Among the bigger issues is the notion that network neutrality requires mandatory “best effort only” service for consumer users, without any allowances for quality of service mechanisms.

What is not clear is whether the present complete ban on paid prioritization (“fast lanes”) will be changed, however. It is possible, perhaps even likely, that internet service providers will be barred from providing quality of service mechanisms only for their owned services or apps. But QoS might well be allowed if all app providers can have the same QoS applied to their services as well.

The big issue is whether such entities have to pay for such features. Some of the larger ISPs maintain any app provider--including themselves--can use QoS features under the same terms and conditions any ISP applies to itself.

Most likely, the new rules to be made public in a few months, will roll back the regulation of internet access as a common carrier service until Title II of the Communications Act.

All such changes in regulatory framework can change business models, or potential business models, for the regulated actors. Ending common carrier regulation can, in principle, lead to more changes in prices, terms and conditions, at a faster pace.

As always, the degree of competition in the market will shape the direction of any such changes, and the amount of consumer welfare that might result.