Early 5G Business Cases Will be Tough

Tough revenue models are an underappreciated element of the 5G business case. It is easy to toss around notions that the three big buckets of opportunity are mobile broadband for humans; low-latency services and massive internet of things apps.

The problem is that it seems increasingly likely that each potential use case has competition. For enhanced mobile broadband, 4G keeps getting better. As it does, it limits the value proposition for 5G mobile internet access.

Likewise, as important as massive IoT might be, 4G alternatives also are coming to market, and even for low-latency applications, 4G is making improvement in that area as well.

The point is that we might well find, in the early going, that there is not as much incremental revenue from 5G as might be hoped.

In other words, as important as internet of things and services for non-humans are likely to be for mobile operator revenue models, IoT connectivity revenue is likely to be disappointing for most mobile service providers.

Of a total of US$227 to US$581 billion in total IoT revenue in 2020, perhaps $10 billion to $29 billion will be earned by supplying connectivity services. That represents something between four percent and five percent of industry revenues.

Most of the upside will come from devices, security services, applications and platform services.

sources: IDC, GSMA, Gartner, John Kjellemo

For some of us, that points out the possible importance of fixed wireless services as an early driver of 5G revenues. In some markets, where there is high demand for fixed broadband connections, but where there also are some challenging gigabit access deployment scenarios, 5G fixed wireless might be the clearest, most tangible new revenue stream to reach any scale. 

Until quite recently, though stand-alone fixed wireless networks have proven to have a positive business model for wireless internet service providers, in many cases,  mobile networks have not been effective substitutes for fixed service to the same extent.

Neither average or peak mobile specs, nor the cost of using mobile data have been anywhere close to comparable to fixed network specs or prices per consumed megabyte.

In fact, fixed network data costs, on a cost-per-megabyte basis, routinely have been in the 20 times to 60 time lower scale than mobile data. Where fixed network data might cost cents per gigabyte, mobile data costs dollars per gigabyte.

source: Mobile Experts

Long Term Evolution-Advanced (LTE-A) will prove an important break, in that regard, by offering access speeds more equivalent to fixed networks, at costs more equivalent as well.

In South Africa, internet service provider Afrihost has created LTE-A usage plans that feature a cost-per-gigabyte of about 18 cents per gigabyte.

For many accounts, that is comparable to the value of a fixed network connection.

source: Afrihost

Traditionally, mobile and fixed network access have been highly different in their consumption modes, so the new plans are important in that they move in the direction of unified plans with a “mobile” or “per device” character instead of a per-location character.

In some markets, for example, monthly usage allowances for a fixed internet access connection might be in the neighborhood of 300 gigabytes. The new Afrihost plans support that amount of usage, for the biggest usage plans, per device.

Why Dumb Pipe is So Hard to Avoid

One might argue--based on history--that many firms and segments within the telecom ecosystem should not try and “move up the stack” (occupy new roles within the ecosystem), while some firms and segments have no choice but to try and do so.

One line of argument it that such moves are highly risky, and rarely succeed. That is true for any large firm, and not specific to the telecom industry.

A second set of arguments is that, in some parts of the ecosystem, the core business is, in fact, dumb pipe, and cannot easily be augmented or changed. That might well be nearly-completely true in the trans-ocean capacity business, arguably much less true in other retail parts of the business.

Consider return on capital, which for a telco might be seven percent (or less) on invested capital. App providers can earn 28 percent returns. In other cases, where marketplaces can be created to connect asset owners and customers directly, ROIC can be as high as 112 percent.

Source: Sanjay Kamat, Bell Labs

A final set of arguments might simply deal with the cost of such moves, weighed against other competing needs for capital, the impact on debt loads and the costliness of such assets, when purchased with telco currency (equity market valuations of telco buyers and app sellers).

To begin with, there is substantial evidence that all large acquisitions are difficult, and often fail to bring the hoped-for advantages. In fact, KPMG has argued that as many as 83 percent of mergers and acquisitions fail on one or more dimensions. Other studies suggest failure rates range between 70 percent and 90 percent.

A tier-one service provider, operating at scale, likewise needs scale even in its new business ventures, so such risks are nearly impossible to avoid.

Telco executives who actually have tried various means to occupy new roles, with new revenue models and revenue streams, know just how difficult this is to accomplish. On the other hand, they also know that amassing scale by making horizontal acquisitions (buying other service providers) most often does work, at least temporarily, in building scale, gaining efficiencies and growing gross revenue and possibly profit margins as well.

At a cultural and skills level, such efforts to create new roles within the ecosystem necessarily mean moving outside a self-understood “area of core competency.” At a practical level, this almost always happens by means of acquisition, since it is hard to gain measurable revenue impact when investing in a startup, or any other small firm, no matter how promising.

It is harder to evaluate the argument that moves “up the stack” into new roles within the ecosystem might well be impossible for some actors. It always is harder for small firms, undercapitalized firms and firms operating in smaller revenue niches.

Much of the reason is the cost of such moves (taking on debt, diluting a currency, buying a high market multiple asset with a low market multiple currency).

Telcos have a problem in that regard, as equity markets apply a low multiple of revenue to telco revenue, and a higher multiple of revenue to application (over the top) assets.

source: Kleiner Perkins

The point is that moving into new roles within the telecom, internet or business ecosystem is risky and expensive, when it is possible at all. So for many actors, if a particular role in the ecosystem becomes relatively less attractive, horizontal acquisitions, and then harvesting assets until an asset sale can be managed, is the logical strategy.

In a contracting industry, which the telecom industry already has become, in some markets, consolidation therefore becomes inevitable, as does profit margin pressure. In some instances, we must hope, at least some  tier-one providers will make a successful move into adjacent roles in the ecosystem, offering not only new revenue sources and different business models, but also higher profit margins.

IoT, AI, Edge Computing, 5G, Fiber-Deep Networks All Related

The internet of things, artificial (or augmented) intelligence, edge computing, low-latency application requirements, 5G, fiber-deep networks and mobile small cell architectures all are related trends. IoT, in many cases, will require low-latency computing, using advanced AI techniques with processing necessarily localized.

That, in turn, dovetails with the use of 5G and other communication networks that will have to support low-latency communications and highly-distributed computing nodes using 5G air interfaces, small cell architectures and fiber-deep distribution networks.

source: CB Insights

Google Launches IoT Platform

One example of the challenges telcos will face as they ponder moving into platform portions of the internet of things ecosystem are moves by rivals with business advantages. Consider that Google has officially launched its Google Cloud IoT Core service into public beta.

Google Cloud IoT Core is a fully managed service on Google Cloud Platform (GCP) that helps businesses secure and manage their connected IoT solutions.

Google Cloud IoT Core integrates with other Google analytics services such as Google Cloud Pub/Sub, Google Cloud Dataflow, Google Cloud Bigtable, Google BigQuery, and Google Cloud Machine Learning Engine.

Pricing is based on the volume of data exchanged with Cloud IoT Core.

Rate of Cord Cutting Slowing?

“The number of current pay-TV customers who plan to cut the cord has actually declined, and the number of hours spent watching old-fashioned, time-slot television is growing,” said Peter Cunningham, Technology, Media, and Telecommunications Practice Lead at J.D. Power.

To be clear, a new J.D. Power survey only shows that the rate of decline has slowed. The percentage of customers who say they plan to cut the cord on pay-TV during the next 12 months has declined to eight percent this year from nine percent in 2016, the company says.

source: Mary Meeker

The study might be interpreted as suggesting streaming and linear viewing modes are reaching some sort of equilibrium. We will have to wait and see. Many other forecasts suggest that newer modes (mobile, especially) are growing, though that does not directly speak to the issue of linear versus on-demand viewing.

Despite growing satisfaction with streaming video services and widespread use of DVR and video on-demand, the number of hours spent watching regularly scheduled television programs has increased by nearly an hour between 2015 and 2017, J.D. Power says.

In a typical week, households have spent an average of 17.4 hours watching regularly scheduled programming in 2017, up from 16.6 in 2015.

source: BCG

Why Voice is Not Central for Next Generation Networks

A fateful decision was made when the global telecom industry decided the next generation network would be based on Internet Protocol, and not some traditional architecture such as ATM.

All of today's strategic issues around "over the top" services and value grow directly from that architectural choice, since IP fundamentally separates network access and all applications that run over the IP networks.

By definition, all apps are "over the top," no matter who owns those assets. In choosing to build the next generation networks on IP, the industry also chose to create the "dumb pipe" business model.

Even when telcos sell carrier voice, those services architecturally will operate "over the top."

At the same time, voice is receding as the core revenue driver.

According to Reza Arefi, Intel director of spectrum strategy, nobody is working on voice as part of 5G at any of the core standards bodies. That might come as a shock to many observers, but simply seems to point to the changing value of various revenue streams in the access business, and the fundamental way applications are created and delivered on modern networks.

The lack of focus on voice also is a reflection of changes in the core requirements for modern communications networks, where the growing range of capabilities come in the “connecting computing devices” area, not voice or messaging.

Also, the growing reality is that voice is a feature, less a key revenue driver. It is a key function, to be sure; just not the driver of revenue growth.

That, in part, explains the lack of work on voice as a core feature of 5G. That “neglect” is not new. You might recall that the 4G standard also did not originally support voice, either.

It might be reasonable to argue that 5G standards work does not include voice support because voice is seen as a service supported on 4G. Others might argue some extension of voice over Wi-Fi will be part of the solution.

Consider revenue drivers for the industry globally, which are predicted by STL Partners to continue declining significantly.

source: STL Partners

Nearly 1/2 of Linear Video Customers Might Consider Switching Next 6 Months

source: Tivo

Nearly 84 percent of respondents to the most-recent Tivo survey of consumers still buy a linear TV service, while 16 percent of respondents do not. “Price” was cited by 85 percent of the non-buyers as the reason for not subscribing. About 46 percent reported using a streaming service as an alternative.

Even if the top reason for not buying a video subscription is “price,” the actual reason likely is “value,” including both demand for video and its price.

Of the 83.9 percent of respondents who subscribe to pay-TV service, 8.9 percent have switched providers in the last three months, Tivo says. When asked if they planned to leave their current service providers in the next six months, 6.3 percent said they plan to cut their pay-TV service entirely.

Another  8.1 percent plan to change to another provider. In addition, 4.5 percent plan to switch to an online service or app. About 30.6 percent report they might make a change.

Altogether, 49.5 percent of respondents could potentially leave their current entertainment video provider in the next six months, Tivo says.

Fully 56.1 percent of respondents report they would stay with their current provider if they could choose and pay for only the channels they typically watch. Another 38.8 percent would stay if all video providers (Netflix, Hulu, Amazon Video and so forth) were combined into one place.