Up the Stack or Forward in the Value Chain?

Sometimes, moving up the stack is a business strategy, as hard as it is to achieve. More often, horizontal acquisitions for scale have driven telecom service provider acquisitions.

Sometimes, moving forward into the ecosystem supply chain also can work. Paradoxically, moving forward in the video entertainment subscription business (often understand as integrating lower inputs into a finished product or service) also means moving up the stack.

Either approach--up the stack or forward integration--is risky, in part because such moves represent moves outside the present understood core competence, but also because other firms will tend to resist buying horizontal functions and services from a key competitor.

Moving up the stack sometimes can mean acquiring assets that are a foundation for today’s core offerings. That paradoxical move is not, strictly speaking, a move “down the stack,” but is an example of vertically integrating a “cost of goods” input.

The best examples likely are video content producers. Owners of networks provide the core value behind the purchase of streaming video services. Strictly speaking, they operate up the stack.

Functionally, they are the basis for service provider video entertainment offers, a cost of goods that is almost a “down the stack” input, in a business sense. In other words, a video service cannot be created without access to the content consumers want to buy. In that sense, content is a raw material needed to build a video entertainment service.

source: http://keydifferences.com

Most telecom acquisitions have been of the horizontal variety, where a company buys additional assets in its existing place within the ecosystem (more access assets). That is an example of growing scale within the same business, instead of growing scope by occupying new roles within any ecosystem.

source: http://keydifferences.com

You might argue that acquiring such assets, that are required horizontally for all suppliers in a market, are a logical way for access providers to move up the stack. It never is easy, for simple reasons.

When making a horizontal acquisition, the acquiring firm simply gets bigger, doing what it already does. That means the acquiring firm already understands the business, and can hope to take out costs.

Moving into a different role within the ecosystem means moving outside the area of believed core competence. That always carries more business risk.

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Also, when a function, or set of assets, is required by all service providers in a particular market, those competitors will logically try and avoid using a set of horizontal assets owned by a key competitor. So it is harder to occupy a new horizontal role. New business competencies are required, but competitors also will try and escape using the horizontal platform, if they can.

Big Questions about IoT Connection Choices

No matter how one looks at the 5G business model, there are huge questions. Consider the fundamental issue of how big incremental new revenue opportunities will be. The "big three" use cases always are said to be enhanced mobile broadband; low latency apps and massive machine-to-machine apps.

Briefly, here are the unknowns. Much of the 5G upside from enhanced mobile broadband initially will come from users upgrading from 4G. There is some incremental revenue upside, but most of the revenue will simply come from users switching from 4G to 5G.

In the IoT area (massive machine-to-machine apps), there are questions about which networks will gain. Not only are multiple network platforms conceivable, ranging form Wi-Fi and other local access options, but also dedicated IoT networks (LP-WAN), as well as 4G and 5G.

Will enterprises choose a 4G or 5G solution when looking at mobile networks for IoT connectivity?

As use of internet of things services grows, the value of connectivity services is a key concern for mobile and fixed network operators, as every sensor has to be connected, and billions of new sensors are expected to be deployed.

In the early going, no clear pattern other than “all the above” has emerged. Wi-Fi, mobile networks and fixed networks all are used, according to a Vodafone report. That could change as the business grows, but so far, there is no clear pattern.  

source: Vodafone

Going forward, enterprise executives say they are looking at both 5G and low power wide area networks as possible platforms.

Of the new LP-WAN platforms, NB-IoT, running on 4G and LTE Cat-1 and Cat M-1 are getting attention, as are the specialized LP-WAN networks.

source: Vodafone

The proportion of companies using the internet of things has more than doubled, a new report by Vodafone says.  Adoption has risen from 12 percent in 2013 to 29 percent in 2017, Vodafone says.

Transport and logistics (19 percent to 27 percent) and retail ( 20 percent to 26 percent) have shown the largest year-on-year gains from 2016.

source: Vodafone

How Close is Mobile to Becoming a Full Substitute for Fixed Networks?

The latest Federal Communications Commission report on the mobile industry in the United States, based on 2015 data that is several years old, shows the need for hard thinking about communications policy.

It is not simply the state of the mobile industry, but the coming changes that will make mobile solutions competitive with fixed network solutions in many (in some cases most) instances. That, in turn, suggests a rethink of fundamental communications policy.

As the business model for fixed networks gets worse (in the consumer space), the business model for mobile--as an access solution--gets better. How much better, compared to fixed, is the real issue.

Some policy advocates reject the notion that mobile is a reasonable and customary replacement for fixed networks. Others would contest such views.

There are many issues:

• Can mobile really be fully effective substitute for fixed network access?
• What will happen in the 5G era, and what will that mean?
• What policies need to be created as landline usage continues to dwindle?
• How much flexibility should “carriers of last resort” have in supplying demand?
• How much demand actually exists for fixed network access?
• How soon could mobile alternatives be viable replacements for fixed access?

One question is whether consumers actually are comfortable with a mobile-only solution to their internet, voice and messaging needs. At a high level, the number of mobile accounts in service is equivalent to the U.S. population, so the notion of full mobile substitution for fixed access seems feasible, if pricing, quality of service and other typical terms of service are equivalent.

Looking only at “human” users, the number of accounts in service is about 324 million, or nearly the population of people older than perhaps 13.

The U.S. population is about 326 million. Retail accounts used by people (not including wholesale lines or connected devices) number about 322 million.

source: FCC

source: FCC

source: FCC

The key point is that consumers broadly have embraced mobility as a preferred solution for their communication requirements. A growing percentage also seem to prefer mobile to such a degree that 58 percent of U.S. children 18 and under live in homes that are mobile-only.

So the notion that mobile can be accepted as a full substitute for fixed network services seems reasonable enough. The political and regulatory issue is whether service providers should be free to use more-affordable, rather than less-affordable platforms, as use of the fixed networks continues to drop.

At the moment, it appears that a typical tier-one service provider--cable or telco--gets about 40 percent to 50 percent take rates (locations that buy service from the provider). By definition, that means stranded assets--facilities that generate no income--range as high as 50 percent to 60 percent. One might argue that is inherently unsustainable.

One possible objection to viewing mobile networks as a potential full substitute for fixed networks is mobile network coverage. That does not seem to be a bigger issue than for fixed network coverage. Also, the mobility market features multiple providers (just how many are sustainable long term is an issue).

The FCC report suggests coverage by three or more competitors is 97.9 percent. Yes, there still are rural areas where coverage might be provided by only a single provider. But we have solutions for such instances. High cost support or universal service funding are the traditional remedies.

One might conclude that mobile platforms actually cannot provide fixed network equivalent service in some two percent of instances. In other cases it might still be possible, given the relative cost of fixed or mobile solutions in rural areas.

source: FCC

One historic problem has been that mobile network internet access speeds have lagged fixed networks.

The FCC report--based on 2015 data--suggests that median downstream speeds per device range from about 10 Mbps to 14 Mbps, on average, enough to support video streaming. Keep in mind that mobile bandwidth is supplied per device, not per location. There is no inherent requirement for sharing that bandwidth across multiple devices.

Also, speeds have increased significantly since 2015, according to Ookla. In the U.S. market, downstream speeds now top 22 Mbps. In fact, speed grew 33 percent, from 2015 to 2016, and another 19 percent from 2016 to 2017, according to Ookla.

In the 5G era, median speeds will climb perhaps an order of magnitude on a median, per-device basis, and as high as a couple orders of magnitude in some locations.

source: Ookla

source: FCC

The FCC’s own tests suggest that the the main supplier 4G brands--measured on a “mean” basis--operate even faster than the median speeds, from about 14 Mbps to 19.5 Mbps.

source: FCC

One big issue might concern availability of multiple competitors in low-income areas. That might be a bigger issue in rural areas, compared to urban areas, simply because the cost of mobile infrastructure in urban areas is much lower than in rural areas. According to the FCC data, the number of providers of 4G service, across all income ranges, is at least four in each area.

Such data does not speak directly to the issue of affordability, but one point is that multiple providers operate in areas inhabited by people of all income brackets. In fact, availability to people in the lowest income bracket is higher than in any other income bracket.

source: FCC

So one possible conclusion from the latest FCC report is that the fundamental regulatory policies governing fixed and mobile communications solutions might be in need of a fresh review. “How” service is supplied might need to be reviewed, as it might not make such a difference whether hybrid fiber coax, fiber or copper access platforms, mobile or fixed wireless platforms are used.

Beyond that, there now are strong arguments to be made that former incumbents have lost the ability to shape demand, prices, terms of service and value in communications markets. In some instances, cable TV operators are the leaders. In all cases, mobile now represents a growing and preferred way to use communications.

That suggests the growing possibility that old rules which made sense when there was a true dominant carrier might need to be revisited.

Virtualized Networks Key for 5G

Mobile networks need to virtualize so service providers can better address a wide range of use cases beyond smartphones, including low-bandwidth machine-to-machine apps, low-latency services as well as ultra-high bandwidth scenarios, said Lynn Comp, Intel senior director.

Without automating, such flexibility cannot happen, at least not with manageable operating costs. Networks will need to spin up, and spin down services automatically, said Comp. That means network functions virtualization (NFV) are essential for 5G success.

And, fundamentally, NFV means disaggregating hardware and software.  

The next three to four years will witness mobile networks evolve in a way that is more transformational than was the shift to IP in mobile networks, ABI Research argues.

According to ABI Research, technology trends that address these challenges today and also lay the groundwork for 5G in future include

• bthe application of virtualization and software-defined networking technologies to mobile networks
• the  evolution of the mobile edge to improve customer quality of experience (QoE)
• the creation of monetization opportunities for the operator
• the growing need for an effective self-organizing network (SON) solution
• the use of big data analytics to leverage granular network data to enhance network performance

Stagnating average revenue per user and increasing network traffic are driving operators to be more cost-effective and innovative in network performance and operations management and network upgrades, said Prayerna Raina, ABI Research senior analyst.

IoT Impact in 3 Years?

It is reasonable to suggest the greatest value from internet of things applications will come from insight gleaned from all the raw data, not the actual creation of data or connections to support the gathering of that data.

A survey of enterprise executives conducted by the Economist Intelligence Unit found 38 percent of respondents believe the internet of things will have “major impact” in most markets and industries within the next three years. Some 40 percent believe IoT will have some impact in a few markets or industries within the next three years.

With the caveat that even industry insiders can be wrong about technology impact, and the further qualification that the impact of IoT within a three year period was the framework, there is significant belief that the insights gleaned from IoT will have impact on some to most industries.

As always is the case, we are most likely to err on the time frame. In most cases, gaining business value takes longer than most expect. On the other hand, important new technologies virtually always have greater impact than initially forecast.

source: Economist

What if 4G Emerges as the Key IoT Network, Not 5G?

Business model viability is perhaps the biggest single challenge most service providers now face, as legacy revenue sources that drive the business mature and decline. In that regard, 5G is  viewed as a strategic platform to support new machine-to-machine, low-latency and other services requiring ultra-high bandwidth.

At the same time, the importance of legacy solutions is hard to avoid. Consider that the bulk of existing internet of things apps run on 2G networks, for example. Of course, most believe the huge wave of growth is yet to come.

Ovum’s forecasts suggest mobile network machine-to-machine (M2M) revenue (not including NB-IoT) will reach 733 million globally by 2021, with global annual revenues of $67 billion in 2021.

Keep in mind that this forecast includes all service provider revenues earned from IoT services, not simply the value of the access connections. One might argue that the key variable is the ability to generate revenue “up the stack,” from platforms, applications and services.

The greatest revenue will be earned in Asia, North America and Western Europe, Ovum predicts. IoT connection revenues will total US$ 22 billion in Asia,  US$ 16 billion in North America and US$14 billion in Western Europe, Ovum predicts.

Of all current mobile generations, LTE will be dominant in the long term, accounting for 212 million connections in 2021, Ovum predicts.

That should provide an opportunity for reflection. If 5G business opportunity is premised in large part on IoT services, that reliance on 4G, if it emerges, will limit the 5G revenue opportunity.

In 2021, 2G and 4G will be at a point of parity, while 3G will account for 172 million connections, Ovum predicts.

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source: Ovum

SD-WAN a Substitute for MPLS?

As hot a trend as suppliers believe software-defined wide area networks (SD-WANs) might be, there is a recurring question about the impact of new SD-WAN deployments on existing business data networks such as MPLS.

Some argue SD-WAN will have most impact in the smaller business or remote enterprise location segment of the market, in terms of new account growth, in large part because SD-WAN might enable deployment at lower cost.

Others might argue SD-WAN also might limit the growth of new MPLS deployments, as SD-WAN will allow aggregation of location bandwidth (internet and MPLS). So, in some cases, additional capacity requirements could be met by adding SD-WAN, not additional MPLS resources. In that view, SD-WAN will have the primary impact of limiting additional MPLS growth.

Perhaps some will argue that SD-WAN can replace MPLS. As with most new technology trends, all three developments will happen, simultaneously. Longer term, the issue is less clear.

Many important new technologies develop first as lower-functionality alternatives to existing high functionality platforms. Over a period of time, those new alternatives begin to move in the direction of higher quality and more features, until, eventually, they become full substitutes for legacy products.

That is not a certainty for SD-WAN, but it is unwise to ignore human cleverness and platform evolution. Still, most would acknowledge, as a sheer matter of physics, that SD-WAN cannot control core network quality of service, whatever it is able to do at the edge of the core network.

The issue is how many use cases that will be good enough to support.