In 4Q 2017, AT&T Earned 85% of Fixed Network Consumer Revenues from Apps, Not Access

One takeaway from AT&T’s fourth quarter 2017 results is the importance of video entertainment, compared to internet access and voice as revenue drivers in the consumer segment of the fixed network business. Consider the wide gulf between U.S. video entertainment, internet access and other revenues: video drove 74 percent of fixed network consumer revenues.

Internet access represented just 15 percent of total, while the “other” category generated about 12 percent of total revenues.

source: AT&T

One way of describing those results is to note that internet access is a “dumb pipe” service. Both voice and video entertainment are “apps.” So AT&T, in its fourth quarter, generated 85 percent of its consumer fixed network revenues from “apps” and only 15 percent from dumb pipe internet access.

That, in turn, illustrates why AT&T will look to applications, services and maybe platforms as it grows its internet of things and 5G businesses. Ignoring profit margin for the moment, apps and services are where the money is.

5G Telecom New Revenue Growth Shifts to Enterprise Sources

The telecom industry is moving to new business models that change revenue opportunities in both mobile and fixed realms. Among the biggest changes: mobile revenue growth is going to shift to enterprise, away from consumer; from people to sensors. And fixed network revenue growth likewise is shifting from retail to wholesale.

In the mobile segment, the advent of 5G networks actually represents a discontinuity. As mobile subscriptions sold to people saturate, growth is going to come from selling connections to sensors and internet of things devices, in part.

The bigger change is that mobile access providers will have to move up the stack into higher-margin services and apps that underpin the value of IoT.

The precursor is what is happening in media and communications, as more mobile and fixed operators discover that growth hinges on moving into the content portions of the internet ecosystem.

In the fixed network, more of the value is coming from backhaul for smaller cells, as well as services for IoT, inherently an enterprise opportunity, for the most part.

As mobile and untethered access becomes dominant, with new mixes of licensed and unlicensed spectrum, the business value of the fixed network also is changing, with unlicensed spectrum assuming a bigger part of the facilities mix.

There is a simple explanation for that forecast. Essentially, 5G cannibalizes 4G, as 4G cannibalized 3G and 3G cannibalized 2G, and 2G displaced 1G.

Revenue upside from new applications and use cases does occur, though. Apps and use cases based on internet access are displacing voice and messaging revenue, for example.

That will be true for 5G, as well. In principle, it is services and apps supporting internet of things (non-human users) that represents the incremental growth, as 5G for human users will mostly be simple displacement.

And most of those non-human use cases will involve enterprises building networks, and offering services, involving sensors and big data analytics to “do things in the real world” based on insights gleaned from patterns in all that big data.

source: Strategy Analytics

source: Strategy Analytics

App Providers Do Not Treat Their Own Bits "the Same" As All Others

One of the frustrations I have with discussions of network neutrality is the overly-broad application of the concept of “treating all bits alike” with the obvious reality that all bits are demonstrably not treated alike on today’s internet.

Ignore for the moment that governments often simply outlaw some apps and content. Forget “treating all bits alike,” some bits are simply blocked.

Even if one assumes network neutrality is about “treating all bits the same,” that does not happen. Most large app providers--and eventually virtually all--use content delivery networks to improve user experience, precisely by treating their own bits differently from others that do not use CDNs.

Google, Amazon, Microsoft, Facebook, and Netflix, for example, operate their own content delivery networks. Such private CDNs represent 61 percent  of all CDN traffic, rising to 68 percent by 2021.

By 2021, 71 percent of Internet traffic will be delivered from a content delivery network (CDN), up from 52 percent  today, Cisco predicts.

source: Cisco

In other words, the way consumers experience the internet already includes the clear recognition by app providers that delivery of bits benefits from not treating those bits in a “best effort” manner when flowing across wide area networks.

As one Cisco blogger notes, “the content is concentrated in the hands of a few companies, and the delivery of this content may bypass much of the Internet’s infrastructure if it is delivered from within a user’s metro area and traverses only a single service provider’s network, so it isn’t “Internet traffic” in any meaningful sense.”

That is the point: the internet is deemed too unreliable to provide consistent end user experience, so the major app providers simply build their own networks to bypass the internet. In principle, then, allowing consumers to have the equivalent of CDN features all the way to where they are is really what network neutrality is about.

In fact, most consumer apps--and all major apps--use CDNs to deliver their own bits faster, and in a more-predictable way. For business reasons, at least some app providers see business advantage to prohibiting access providers from using CDNs.

There’s more.

Though net neutrality includes several key elements--some of which, such as “no blocking or degradation of lawful apps”--are universally supported, a key “strong” net neutrality concept is that consumers cannot be allowed the use of CDN features through their local access networks (mobile or fixed).

There are other “extreme” understandings of net neutrality that go even further, limiting even the use of promotional or other sponsored forms of internet access that clearly benefit consumers, since those “no incremental cost” access programs eliminate the need for consumers to buy internet access to use apps.

Japanese mobile provider Line, for example, offers both free data (at low rates) as well as for-fee faster internet access, allowing its users to switch between modes as they choose. Some might call that sponsored access a violation of net neutrality.

Also, Line allows its users unlimited use of some apps, such as Line Messenger, Line Calls, and Line Video Chat without any data usage chargers. In favoring its own apps, Line most assuredly does not treat all bits and all apps the same.

Other mobile operators have different policies that operate in similar ways, exempting consumption of music or video from data plan charges, for example.

In principle, those policies are simply business practices, similar to free shipping, toll-free calling or any other promotional activity any business uses. Ironically, net neutrality supporters try to stretch the concept of “treat all bits the same” in ways that stifle the effort companies take to innovate and provide distinctive value--that often saves money--for their customers and users.

Some might say it is simply irrational for app providers that do not treat their own bits equally with other “internet” bits to deny that same practice--which does improve user experience--to other actors in the internet ecosystem.

Gigabit City, Or Not?

As often happens in the telecom and technology businesses, companies make announcements by press release. Sometimes, the releases are accurate, but the headlines or summaries are factually incorrect.

“The City of Santa Maria will become the Central Coast’s first truly gigabit city under an agreement with Wave Broadband,” reads a summary on a press release announcing that

Wave Broadband will complete construction of the City’s fiber-optic ring.

The release also says the network will “bring reliable, high-speed gigabit service to City departments, businesses, schools, and residents as a whole.” That last clause--”residents as a whole”--seems to refer to public Wi-Fi hotspots to be activate as part of the municipal network.

The release says the municipal network “will also allow the city to offer public Wi-Fi in its revitalizing downtown core,” while Wave evaluate “providing Wi-Fi in residential neighborhoods where traditional carriers have been slow to upgrade internet service.”

The claim of “gigabit city” seems overblown, if the actual words are accurate. There is nothing wrong with public hotspots. But most observers would think the term “gigabit city” also includes residential gigabit service at home locations.

Now, it is possible that whoever wrote the release confuses Wi-Fi with fiber to the home service. It also is possible that Wave is considering some new deployment offering Wi-Fi in residential areas.

That seems out of character for Wave, which has been building fiber-to-home networks for residential customers elsewhere.

The point is, the release is confusing. That is not unusual, unfortunately.

New S&P 500 "Communications Services" Segment Shows You Where We Are, Where We are Going

Though impressionistic, a coming September 2018 change in industry categories--combining telecom, tech, media, and entertainment companies--tells you something about fundamental changes in the internet and telecom ecosystems. To wit, the changes show--in part--that connectivity and apps now are becoming parts of a single market.

The new S&P 500 sector called Communication Services also is being created because the former “telecom” sector now includes too few firms. The new Communications Services sector will replace the former “Telecommunication Services” category.

But the rationale is important for larger reasons. S&P Dow Jones argues that tech and content and app companies have become a lot more integrated.

Verizon, AT&T and Comcast,  for example, have made acquisitions to become content, mobile and internet services providers. Google now makes devices and provides mobile and internet access service, not just key internet apps. Facebook and Amazon have made smaller moves into either internet access and network infrastructure, or into devices.

The other important change is that both Netflix and Amazon also will be part of the single Communications Services category. Google and Facebook are moving into e-commerce or content, or both.

The larger point is that 30 years ago, the global telecom business was the center of its own industry and ecosystem. It created its own apps, built its own devices, conducted its own research and built its own network equipment.

These days, research and development primarily is conducted by third parties. Devices are supplied by other third parties. And most apps are created--”over the top”--by third parties.

And as all legacy revenue streams atrophy, the telecom industry has become--essentially--a tail on an internet dog.

At the same time, large app providers increasingly are integrating functions once provided by service providers. From owned undersea cables to hyperscale data centers; from devices and mobile services to local internet access services; from voice to messaging; other firms with business models based on advertising or commerce are competing both with telecom service providers and consumer electronics manufacturers.

In principle, that is why firms such as Comcast, AT&T, Verizon, NTT and others are moving into new lines of business other than “access or transport” services.

So, though impressionistic, the new S&P 500 Communications Services category tells you quite a lot about where the business is, right now, and where it  is going.

Cord Cutting by Heavy Users Saves Them $115 a Month, Study Finds

Customers who seem to the heaviest users--and cut their linear video subscription--saved about $115 each,  study by LendEDU finds.

The typical heavy users--spending more than $140 a month total on entertainment video, also reported buying three streaming services, though, spending an average of about $33 a month on streaming services.

Some 77 percent of the cord cutters report they still continue to buy streaming services, and report spending about $35 a month on streaming services.

source: lendedu

When current cable subscribers were asked whether they use their linear services or streaming more, the split was fairly even: 52 percent reported using linear more, while 48 percent reported using streaming more.

Less than 70 percent of the current linear video subscribers estimated they still would be buying in a year. Three years out, just 44 percent believe they still will be buying a linear service.

The main point seems to be that many consumers still want to buy entertainment video, but are not inclined to spend $100 a month. Many of us believe typical customers will buy multiple subscriptions, up to perhaps $60 a month, total, for all services.

Nokia Launches Future X Platform for 5G

Nokia now is calling its 5G platform"Future X," referring to the reference silicon design and the 5G network itself. Here is what is notable about the nomenclature. The phrase “Future X” actually comes out of Nokia Bell Labs, the research and development unit, and specifically from the title of the first book ever published by Nokia Bell Labs, The Future X Network, written by Bell Labs President Marcus Weldon.

In choosing the name, Nokia also suggests its strategy. The Future X Network will have to deliver different value, Weldon and the team of contributors argues.  Most fundamentally, the value of the network will not be “connectivity.”

"Free" Wi-Fi illustrates the problem. At a recent industry conference, the audience saw a slide illustrating the telecom industry new value proposition, and laughter erupted. It erupted because at the base of the value chain was the phrase “free Wi-Fi.”

Acknowledging the mirth, Weldon suggested that was because the audience of telecom professionals understood very well what was happening.

Go to 08:30 minutes into the video if you just want to hear the discussion of where telecom sits in the perception of value. Or watch starting at about four minutes in if you want to hear the Bell Labs vision of how "value" will be created in the next era.

Simply, the thesis is that value will be created by the network to the extent that it “creates time” for people and augments human intelligence. That might sound ethereal, but the point is that to survive, much less thrive, the global telecom industry will have to find a way to create an entirely new value proposition, one not based on connectivity.

It is challenging in the extreme. So what is noteworthy is that Nokia has chosen to name its entire 5G platform the “the Future X platform,” encompasses eight major technologies, including Nokia 5G New Radio, AirScale Radio Access, 5G AirScale Active Antennas, 5G Small Cells, 5G Anyhaul, 5G Core, Massive Scale Access and 5G Acceleration Services.

Congratulations to Bell Labs professionals who have been able to take a big idea and get it into commercial use at a high level. Best wishes to Nokia in its effort to make the platform concrete.