Why 5G? Why Now?

In many parts of the world, people will question why we seemingly are rushing to 5G. In one sense, we are not rushing. Mobile network generations tend to be upgraded about every decade or so, in large part because mobile operators arguably “run out of things to sell” in each generation.

When the ability to use voice on the go is the primary value, service provides eventually reach saturation. When text messaging becomes the “new thing you can do” with the 2G platform, another wave of growth happens, only to reach maturity at some point.

The third generation was the first to be based on the emergence of new apps beyond text messaging. For better or worse, it took some time for lead apps such as mobile email access, to develop.

The 4G network was the first to feature enough speed that video apps become feasible, and the first mobile generation where mobile apps and internet access actually became pleasant, in terms of user experience. Also, 4G was arguably the first mobile platform where internet or app use cases became dominant, eclipsing voice and carrier messaging.

Simply put, one might argue that, in the developed nations, mobile operators now have reached near saturation for all apps, all use cases and business models built on mobile apps and mobile internet access. Sure, 4G networks keep getting faster, but it is not so clear that revenue is keeping pace. In most markets, prices (and revenue) are falling or flat.

So 5G is seen as the way to create a revenue platform going beyond all existing major use cases. For that reason, 5G is virtually synonymous with IoT.

Faster speeds for human apps is going to be a feature of 5G, but not likely the main driver of new use cases. In fact, the conventional wisdom is that massively-faster human internet access is one of three fundamental use cases. The other two are internet of things and low-latency apps.

What Has Changed Since the Launch of the iPhone

The month of July 2017 marks the 10th anniversary of the launch of the Apple iPhone in 2007. Samsung would claim much of the credit for growth, after the iPhone reshaped the “phone” business, as can Android.

What we sometimes overlook is just how much has changed in just those past 10 years. Mobile computing, by time of use, surpassed "PC" or large screen use. Some whole new industries now are enabled directly by smartphones (ride sharing), while many industries (retail, the restaurant business, lodging, advertising) now are powerfully shaped by mobile interactions.

At the same time, mobile-only use of internet and internet-enabled apps--though a fact in every income demographic--is more important for lower-income users, especially.

It is a subtle shift, but still a shift, that a growing portion of human and future machine uses of the internet happen not primarily because of fixed internet, but because mobile internet is available. It might also be instructive to note that narrowband apps (internet of things) might drive the next big waves of revenue and use cases for internet apps.

Include among those use cases all activities enabled by the global positioning system (location).

And it is hard to imagine that degree of change, in a single decade, were it not for the iPhone.

The overall importance of the iPhone launch, however, goes far beyond the choice of devices people make. Mobile internet access has driven revenue growth for mobile operators in developed nations, even if new subscribers and voice have continued to drive revenue in developing nations.

source: StatCounter

source: StatCounter

Over the last decade, we have seen the rise of what some call the app economy or Over the last decade, we have seen the rise of what some call the app economy, which did not exist in 2007.

That is a bit of a misnomer, but the point is that whole businesses such as Uber are directly enabled by the widespread use of smartphones and faster mobile internet access. , which did not exist in 2007. That is a bit of a misnomer, but the point is that whole businesses such as Uber are directly enabled by the widespread use of smartphones and faster mobile internet access.

Just how much some businesses will be “mobile only” or “mobile first” is a good question. Some might argue that is not presently true, and might never be true, for some activities humans conduct on devices using screens.

Similar questions might be raised about the eventual use cases for internet of things apps (some might be useful only when mobile (connected car), others might be stationary (industrial sensors, light posts, parking spaces), others will be ambient (health and fitness monitors).

The point is that although most human activities have been reshaped by the internet, only some are directly dependent on the use of smartphones and mobility.

To be sure, most shopping activities have been reshaped by people using the internet. And as the advertising business has likewise been refashioned, now mobile-based usage is producing additional changes. But Uber and other ride-sharing services would not have been possible without widespread smartphone use and faster mobile internet.

Some of you might never have owned or used a feature phone. But some of us can remember the moment we realized even our “crackberries” were no longer our own choices: it was the moment the “web” became more important than access to email. That was the moment when the browsing experience on a BlackBerry became so obviously painful that the advantages of email handling could not outweigh a more-pleasant web experience.

All that, and eventually more, were enabled, one could well argue, a decade ago when Apple launched the iPhone.

source: Business Intelliigence

source: Asymco

source: Intercom

Revenue, Users or Subscriptions: What Matters for OTT Video?

 Some say Netflix now has more U.S. subscribers than U.S. cable TV providers. That is true. But the claim has to be put into context.

There now are about 93.3 million U.S. linear video accounts in service, according to Leichtman Research. Of course, the cable TV segment does have 48.6 million accounts, as Statista notes.

But the linear video category includes both satellite and telco suppliers. So some might argue the appropriate comparison is Netflix or OTT video versus “all linear video subscription” providers.

Looked at that way, Netflix still has some ways to go before it can be said to represent more accounts than linear TV, as Netflix has about half the number of total  linear video accounts.

Of course, Netflix is not the only U.S. over the top video provider. Add up paid subscriptions from Amazon Prime, Hulu, Sling and others and you can make an argument there are as many OTT video subscriptions as linear subscriptions.

For purposes of measuring financial results, accounts--not “users”--are what matters, even if OTT providers or analysts sometimes measure users rather than accounts. The reason is that accounts directly produce revenue.

In some key respects, though, revenue--not users or accounts--remains a key metric. Linear video monthly average revenue per account is close to $100, while OTT service ARPU is closer to $10 a month.

U.S. linear subscription revenue grew was about $107.3 billion ($91 per month.

U.S. OTT access revenue (based on 47 OTT providers and led by Netflix) was about $8.3 billion in 2016, says Convergence Research Group.

One has to be careful about comparing apples and oranges as though they were the “same thing.”

source: Statista

OneWeb Approval Means More Stress on Rural Operator Business Model

There is, in essence, no commercially-viable and sustainable business model for fixed network communications services in many rural areas of the United States, even in some cases where there is but one supplier.  That is why we have subsidies for such services.

But the business model is going to get worse. Even if competition from cable operators do not worsen, and even if internet service providers using fixed wireless, and even if mobile operators do not become stronger competitors, there rather soon will be one or more providers with sufficient scale, and low enough recurring costs, to provide new competition.

OneWeb, for example, plans to offer internet access from a new constellation of low earth orbit satellites that will be able to offer internet access at speeds up to 100 Mbps initially, and possibly a gigabit later, across the United States, and, if fact, covering the surface of the earth, ultimately.

The Federal Communications Commission has approved a request by WorldVu Satellites  (OneWeb) to access the United States satellite market. The action paves the way for OneWeb to provide internet access in rural areas, with scale.

With mobile providing a substitute for voice, streaming providing a substitute for video entertainment and OneWeb (and others) vying to supply internet access, every service provided by a rural fixed network provider can be replaced.

Enough of that demand will be replaced to further stress the rural fixed network operator business model.

ARPU Will be an Issue for 5G

One way fixed network operators have had an advantage over mobile operators is the ability to create differentiated offers for internet access. It is common to find fixed network internet service providers offering a range of speeds, and a range of prices.

You might well wonder why mobile operators have not done so. Technology constraints are the issue.

That regime has not developed in the mobile market (for reasons related directly to the way radios are used in mobile, compared to fixed network customer premises equipment.

Fixed network modems are “nailed up” to specific locations and accounts. That means different offers can be created and supplied.

Use of mobile radio resources always is temporary. Radio resources are allocated and then released on a routine basis, over a period of minutes or maybe hours, with lots of contention for ports. So it simply is inefficient or impossible to offer dedicated speeds.

There are other differences. Retail pricing in the fixed networks business often is by "speed." Higher speed tiers cost more. Retail pricing in the mobile business is by "consumption." Retail pricing is based on actual or expected usage (Gigabytes used). 

To some extent, fixed network ISPs have been able to justify investment in "faster speed" in a couple of ways. Taking market share is probably the biggest reason for doing so. But consumers, over time, also have shown willingness to spend more, to get faster speeds. 

In the mobile business, the upside has largely been in terms of consumption or overages. Speed has not proven a dependable, long term method of gaining and holding market share. Coverage, and the consistency of coverage, arguably is more important, in that regard. 

So the issue is whether mobile internet incremental revenue has grown, in direct proportion to incremental cost. That might be debatable.

By some estimates, revenue is developed nation markets has been remarkably flat, in recent years, despite mobile data revenue growth. The reason is that voice and messaging revenues have fallen almost as fast as mobile data revenues have grown.

source: Strategy Analytics

The point: ubiquitous gigabit speeds might not boost average revenue per account as much as you think.

source: Strategy Analytics

What if 5G Produces No Net Revenue Increase?

The conventional wisdom is that 5G is going to create new revenue sources for mobile operators. That undoubtedly will prove true, to an extent; and perhaps to a significant extent.

What remains unclear is whether 5G actually will produce a net increase in mobile broadband revenues, even if 5G produces a gross increase in such revenues.

In other words, on a net basis, it is conceivable that 5G literally produces no net gain in access revenue. The reason is that, unlike the case in the 3G era, the 5G mobile internet market is going to operate in a mature environment in most markets.

In the transition from 2G to 3G, one might note an overall increase in mobile operator revenues, as the internet access market was young. By the time 4G arrives, growth mainly is substitution, not net growth. That is likely to be the case in the 5G era as well.

To wit, new 5G revenues will include some element of actual growth (IoT subscriptions, for example). But many of the 5G accounts will simply be substitutes for existing 4G subscriptions, so there will be no net gain in subscriptions.

Some will hope for higher average revenue per account. Initially, that could happen. But ARPU will fall fast. So, on a net basis, it is possible there will be no actual gain in mobile data or total mobile revenue.

Some might well ask, “then why do it?” The simple answer is that “doing nothing” might plausibly result in serious negative revenue growth, which is worse than “flat revenue.”

source: Strategy Analytics

No Good Retail Pricing Options for One Small Telco

Ogden, Utah is a one-square-mile town with about 823 households, Ogden Telephone Company is the entity providing fixed network communications services to “over 1500 households and businesses” in Boone County, with internet access speeds up to 200 Mbps, costing between $30 a month for 3-Mbps service up to $330 a month for the 200 Mbps version.

Residential phone service retails for about $30, after the taxes and fees. The firm also provides video subscriptions, supplied over a fiber-to-home network. And there is no local cable TV operator competing for customer attention.

Apparently, customers not choosing a bundle including voice service now have to pay an $80 fee. Other telcos seem to “solve” their revenue problems in similar ways, charging more money per-unit for purchases of “naked internet service” without voice than for a bundle including two or three services.

Sometimes, especially on promotional plans, the cost of buying voice service is low enough to entice customers to buy a triple play plan.

Now, though, it appears Ogden Telephone charges customers who do not buy voice service a fee of $80 a month. Obviously, it makes more sense to buy voice service even if a customer does not plan to use it.

The plan obviously is going to irk customers who otherwise would not buy a voice line. Telco executives are likely to say they have an investment in fixed infrastructure that has to be covered. That is true enough.

But there are other ways to structure retail fees, within regulatory reason. Stand-alone service price could be raised, with discounts on full bundle purchases. Charging a basic “network connection fee” with additional sums for discrete services is likely not lawful. Perhaps none of the alternatives are ideal.

And that is the larger problem. One might question the future viability of most smaller telcos in the United States as all legacy services mature and as service alternatives proliferate. Ogden does not seem the type of community where a new competitor would want to build a fixed network.

So wireless or mobile alternatives, some more exotic than others, would seem to represent the hope for heightened competition in the market.

One is not popular suggesting that, in many situations, any fixed network solution is the “wrong” way to supply communications services in the 21st century. Nevertheless, that might become a reality. And even that outcome might be debatable, in many nations, as even mobile or wireless access businesses face revenue and profit pressure.

Simply stated, without subsidies, there is no viable business model for many rural and small telcos. Those problems are exacerbated as consumer demand for telco products shifts and drops.