FCC Definitions are Floors, Not Ceilings

Defining what broadband means now is an arbitrary exercise, if a necessary task to measure progress. According to the current minimum definition--on fixed networks--of 25 Mbps in the downstream, many internet access services actually cannot be marketed as “broadband,” using the Federal Communications definitions.

People, app experience and markets are not affected by any such definitions, of course. It probably does not matter at all that fixed network 10 Mbps Ethernet is not “broadband,” using the FCC definition.

The definitions do not apply to other wireless or mobile networks, though, a nuance that often is missed.

Still, for most users, it does not matter that most of their Wi-Fi and mobile internet access sessions are not “broadband,” using the fixed network definition. What matters is that user experience is good enough to provide satisfactory interactions.

“Satisfactory” often hinges on the actual use case, of course. Relatively modest speeds are required for most consumer apps, including video, somewhere between 5 Mbps and 25 Mbps. “Twitch” gamers mostly will need more.

Also, floors are not ceilings. Availability is not usage. In fact, U.S. consumer internet access speeds double about as fast as Moore’s Law would predict, and grow by an order of magnitude about every five years.

By some measures, U.S. average speeds are in the range of 19 Mbps. By other tests, even mobile access speeds are in the 23 Mbps range. Some other tests show 2017 average speeds of 55 Mbps.  

source: Speedtest

Though we tend not to pay much attention, U.S. fixed network internet access speeds used by consumers have grown about as fast as Moore’s Law would predict, at least on cable TV networks.

Cable One Offers Gigabit Internet Access to 95% of its Passings

Cable One’s “GigaONE” gigabit internet access service is now available to residential customers across more than 95 percent of its U.S. footprint, representing more than 200 communities.

The primary impact likely will be that more people buy access at lower speeds, ironically. The reason is that when gigabit services are offered, the price of lower-speed tiers tends to drop. And, as you would guess, consumers buy more of a product they like when the price is lower. Verizon, for example, introduced its new gigabit per second at a retail price half that of the former 760-Mbps service, for example.

Gigabit services launches tend to reduce prices of services in the 100 Mbps or hundreds of megabits per second range to drop about  $27 per month, or about 25 percent, according to an Analysis Group study.

In markets where gigabit service has been introduced, prices for internet access in the 25 Mbps and lower speeds also tend to drop, by 14 percent to 19 percent.

Likewise, when two providers sell gigabit services, prices for that service tend to decline by $57 to $62 per month, or 34 percent to 37 percent less.

Actual revenue upside might also be complicated. On one hand, gigabit sells for a higher price. But gigabit availability also tends to mean prices for lower-speed tiers fall. So net incremental revenue is tough to evaluate.

Take rates are part of the equation. Some believe adoption of gigabit services could range between five and 10 percent, in markets where lower-speed tiers also are available.

"Price anchoring" is the reason most consumers able to buy gigabit internet access will not do so. Price anchoring is the tendency for consumers to evaluate all offers in relationship to others. As the saying goes, the best way to sell a $2,000 watch is to put it right next to a $10,000 watch.

Anchoring is why "manufacturer's suggested retail pricing" exists It allows a retailer to sell a product at a price the consumer already evaluates as being "at a discount." Price anchoring is why a "regular price" and a "sale price" are shown together.

In the internet access business, price anchoring explains why gigabit access speeds are priced in triple digits, while low speeds are priced in low double digits, while the tiers most consumers buy are priced in between those extremes.

Service providers who sell a range of internet access products differentiated by speed and price might “typically” find that a minority of customers actually buy the “fastest” tier of service. That is largely because of price anchoring.

People often evaluate a "best quality offer, at highest price" one way against the "lowest quality offer, at lowest price, before concluding that the "best" value is the mid-priced quality, at the mid-tier price.

That was true in the past when the top speed was 100 Mbps as well. Most consumers did not buy the "highest quality" offer, whatever it was.

So it can be argued that gigabit internet access speeds have complex effects on internet service provider business models. Most customers will not buy the top speeds, but will upgrade to faster tiers of service. At the same time, prices generally fall, on a “cost per Mbps” basis.

Consider that Comcast internet access average revenue per account is about $40 a month. Given that Comcast gigabit offers, where it faces little competition, are as high as $160 a month, and perhaps as low as $70 where Comcast faces gigabit competitors, that $40 average suggests uptake of the fastest tiers of service remains less robust than some would imagine.

Against that ISPs must balance the capex to build the faster networks, as well as evaluate the upside from any new apps and services that might be enabled by the faster networks, top speeds or rising average speeds.

The new wrinkle is that ISPs often make gigabit service available in neighborhoods where demand is highest. Doing so might lead to 30 percent take rates in those neighborhoods, as AT&T claims.

Telcos Developing Practical AI Apps

As exotic as artificial intelligence and machine learning might seem, they are becoming routine tools for optimizing networks, discovering and preventing problems on networks, and supporting consumer interfaces and third-party AI aps.

Telefonica is working with Juniper Networks to develop its “Self-Driving Network” solution, which uses machine learning to enable self-configuration, self-monitoring and self-diagnosis. THe idea is to give the network the ability to identify potential problems and correct them--without human intervention--before they cause issues.

Vodafone has been working on artificial intelligence trials in Germany and Ireland with Huawei and Cisco on ways to create a “centralized self-organising network” (C-SON) that identifies the optimal conditions for voice-over-LTE.

AT&T, for its part, also is creating a platform for supporting artificial intelligence apps that run on its networks, in addition to using AI to virtualize its network.

Verizon, among other apps, is looking to use AI to support voice interfaces.

Will WAN Business Exist in 20 Years?

Product substitution has been a big trend in the global communications business, for decades. As customers have deserted fixed voice for mobile voice; over the top video for linear video, OTT messaging for carrier messaging, they might increase substitution of mobile internet access for fixed access.

Eventually, in business markets, large app and content providers might largely rely on their own networks for bit transport across wide area networks.

That is a bit ironic. Logically, cloud computing, which presupposes wide area communications, should underpin communications service demand. That arguably has been the case, historically.

What also is clear is that consumption of data only partially results in revenue benefits for access service providers. What is even more unclear is the eventual role of service providers in the long haul data business.

In the access realm, much of that consumption flows over Wi-Fi connections that generate no direct incremental revenue for access providers. In the transport realm, only some of the increase accrues to transport service providers, as the major content providers increasingly move most of their own traffic over their own global backbones.

Google, for example, will build  three new trans-oceanic optical cables in 2019. By some estimates, Google alone moves about a quarter of all global internet traffic across its own networks.

“Within the next 20 years,the whole concept of the telecom carrier as the provider of the network is going to disappear,” ” says consultant Julian Rawle. In other words, large app providers will replace telecom carriers as the leading suppliers of wide area network data transport.

Those trends should slow enterprise spending on telecom services, to the extent that the largest app providers now are the very firms driving global data transmission demand.

source: Economist

Worldwide IT spending is projected to total $3.7 trillion in 2018, an increase of 4.5 percent from 2017, according to Gartner. Notably, communications spending is predicted to grow 2.4 percent.That, however, is half the rate at which other information technology spending will increase.

Worldwide IT Spending Forecast (Billions of U.S. Dollars)
	2017	2017 Growth (%)	2018	2018 Growth (%)	2019	2019 Growth (%)
Data Center Systems	178	4.4	179	0.6	179	-0.2
Enterprise Software	355	8.9	389	9.5	421	8.4
Devices	667	5.7	704	5.6	710	0.9
IT Services	933	4.3	985	5.5	1,030	4.6
Communications Services	1,393	1.3	1,427	2.4	1,443	1.1
Overall IT	3,527	3.8	3,683	4.5	3,784	2.7
Source: Gartner (January 2018)

source: Gartner

On the other hand, other trends are at work. Major app and content providers now build and own their own facilities. Google, for example, has invested at least $30 billion in its own infrastructure, including its own  undersea networks. So, yes, cloud computing increases the role of communications.

Between 2015 and 2020, tier-one app providers are likely to double their spending on owned undersea facilities, for example.

source: TBR

On the other hand, large app providers now can justify the business case for building and owning their own transport networks.

source: Google

source: platformonomics.com/

source: platformonomics.com/

source: platformonomics.com/

Total telecom revenue in the 60 biggest markets to fall by two percent in U.S. dollar terms, to US$1.2 trillion in 2018, according to the Economist Information Unit.  

Projects in digital business, blockchain, Internet of Things (IoT), and progression from big data to algorithms to machine learning to artificial intelligence (AI) will continue to be main drivers of growth, Gartner predicts.

Enterprise software continues to exhibit strong growth, with worldwide software spending projected to grow 9.5 percent in 2018, and it will grow another 8.4 percent in 2019 to total $421 billion.

The devices segment is expected to grow 5.6 percent in 2018.

DoJ Effort to Block AT&T Purchase of Time Warner is Wrong, Just Wrong

Most observers now agree that the biggest single problem with 5G is the business model. Simply, a new business model must be created; sustainable value and revenues are not a given.

Many believe platforms will drive 5G business models. Others argue with equal logic that new use cases and applications beyond human use of devices will be key. Others emphasize personalized and customized content and services.  

The underlying issue is that 5G is unlikely to create substantial new value--enough to justify the investments--if it winds up being mostly faster 4G,” especially as 4G itself becomes capable of faster speeds and lower latency.

In broad industry context, the enduring problem is that internet access services increasingly are becoming commodity “dumb pipe” (low value, low profit) services, while once-central voice and messaging services continue to diminish as drivers of revenue.

The simple fact is that the industry cannot sustain itself on such business models. For tier-one service providers, a transition to new revenue models obviously is necessary.

That, in essence, is among the reasons some view the U.S. Department of Justice efforts to block the AT&T acquisition of Time Warner so skeptically. Ignore for the moment that the acquisition is strictly vertical, and does not eliminate any competition in the video or access markets.

Ignore for the moment the fact that Comcast already has shown the firm value of such vertical consolidation (or the lack of consumer harm, if that is what you prefer). Basically, Comcast’s acquisition of NBC Universal effectively recast the firm from an “access provider” to a “content producer,” effectively reducing the danger of commodity access trends, declining video and voice services portions of its business.

The danger of the DoJ action is that it prevents firms such as AT&T from transforming their own businesses in ways that make them sustainable, at a time when all the legacy revenue streams are shrinking.

Put simply, reducing the almost-sole reliance on access services is part of the effort to escape firm and industry decline (at a societal level, profitable and healthy communications services are widely believed to be an important underpinning of social and economic health).

As with 5G, firms must create big new apps and services that provide high value, driving revenue sources, simply to justify making the investments in next-generation infrastructure.

AT&T’s effort to acquire Time Warner, and further transform its core business, is the precursor to what firms will have to do in the 5G era as well: transform their core value propositions and business models.

Study Finds Municipal and Competitive Private ISP Networks Have Lower Prices

A study of internet access prices in 23 communities where municipal internet access services are offered has found that “most community-owned FTTH networks charged less and offered prices that were clear and unchanging, whereas private ISPs typically charged initial low promotional or “teaser” rates that later sharply rose, usually after 12 months.”

The comparisons were made of the entry-level services, offering 25/3 Mbps service in 2015 and 2016. In these 23 communities, prices for the lowest-cost program were between 2.9 percent and 50 percent less than the lowest-cost such service offered by a private provider.

In the other four cases, a private provider’s service cost between 6.9 percent and 30.5 percent less.

The study supports the notion that more competition--of any sort--leads to lower consumer prices, whether provided by a municipal provider or a private firm.  

The study does suggest that municipal networks do indeed lead to lower consumer prices. The study might also support the thesis that municipal networks--which often also aim to boost internet access speeds--actually do so.

Those findings arguably are what one would expect if the objective of launching any such municipal broadband network is precisely to provide lower prices and higher speeds (lower price per unit of speed).

One could make the same predictions for private gigabit internet access providers such as Ting, which have a business objective of supplying gigabit internet access at far lower prices than offered by incumbent internet service providers.

The study, conducted by David Talbot, Kira Hessekiel and Danielle Kehl, and published by the Berkman Klein Center for Internet & Society Research, found that in 23 cases, the community-owned FTTH providers’ pricing was lower when averaged over four years.

source: David Talbot, Kira Hessekiel and Danielle Kehl