Will Cable Have 72% Fixed Network Internet Access Share in 2022?

Some 37.2 million U.S. households will buy only internet access, and drop subscription TV services by 2022, according to Kagan Research, a media research group owned by S&P Global Market Intelligence. Some 19 million U.S. households already are broadband-only, the firm says.

By 2022, about 38.4 percent of cable or telco households buying internet access will rely mostly on a combination of broadband and over-the-air broadcast signals for home video entertainment, Kagan Research estimates.

Kagan expects broadband-only homes will grow at a 14.4 percent compound annual growth rate from 2017 to 2022, representing about 29 percent of U.S. occupied homes.

But more than 60 percent of occupied U.S. homes still will buy multichannel video packages, Kagan estimates.

Kagan also estimates that U.S. cable operators will have some 70 million internet access accounts in 2022. That is an interesting figure.

Assume there will be about 136 million U.S. homes in 2022. Assume 95 percent are occupied, leaving a base of about 129 million occupied housing units.  Assume fixed network residential internet access adoption is about 75 percent in 2022.

That makes the total market about 96.75 million locations. If the Kagan forecast is correct, then cable might have 72 percent market share in 2022.

At the moment, cable has about 64 percent market share.

That requires some interpretation, though.

It is unlikely that cable operators facing Verizon or AT&T will do that well. At a high level, cable market share--where the cable operator faces AT&T or Verizon,  could stabilize at about 60 percent.

The reason for that belief is that AT&T and Verizon appear not to be losing market share against cable, and that is before the upgrades by AT&T to gigabit networks, and before Verizon starts to launch new assaults out of region.

It might also be within reason that as AT&T and Verizon increasingly offer gigabit access across broader footprints, and independent providers also take some share, that cable’s share could drop to 50 percent or maybe less, as Comcast, Charter, Cox and a few others find themselves competing against both Verizon and AT&T in some markets, plus a handful of other independent providers.

That development would also assume that new bundles marketed by AT&T and Verizon, plus use of new forms of wireless access, also were successful ways both firms potential grew share.

Researchers at PwC have estimated U.S. fixed network revenues will reach about $60 billion in 2021. That might be low.

Even if the average account generates only $50 a month, or $600 annually, 129 million accounts implies a market of about $77.4 billion. If one assumes average prices (gigabit and higher speed tiers) might sell for $70 a month, or $840 annually per account, then revenue could reach $108.36 billion.

source: PwC

AI Might Have High Impact in Telecom Networks

It often is difficult to explain how and why  artificial intelligence, as used by telecom and internet service providers, matters. But AI has been used in telecom, in some ways, for as much as a decade.

AI seems essential for operating virtualized networks and already is being used for customer service applications and call centers. Self optimized networks that can reconfigure themselves for better performance without manual intervention are a prime example.

That noted, most professionals in the industry will have little immediate need to make decisions about AI, or perhaps even encounter applied AI in their daily activities.

Beyond that, decision makers who must authorize spending on AI also face issues.   

One problem is that  AI most often is a process or feature used by applications and networks, not ever a retail end user service or app. End users and customers cannot actually discern when and how AI improves their service, apps and experiences.

The other problem is that applied AI does not actually lead in a direct way to incremental revenue growth, either. As with other features such as voice control or Wi-Fi access, AI can enhance existing products, provider higher perceived value,  improve stickiness, reduce churn or ease new customer marketing efforts.

But it is difficult to quantify those effects. AI, when applied to processes, apps or services, does not produce a direct uptick in sales or revenue.

Over time, fee-based services could develop, but it always has been difficult to move customers or users from free products to higher-value paid products. That will be true in both for-profit and nonprofit settings.

That noted, AI might have some of the highest possible impact in the telecom industry, McKinsey consultants believe.

source: McKinsey

source: McKinsey

A La Carte Seems to Work, Despite Business Model Concerns

One of the more dangerous statements in the internet or telecom businesses is that something “cannot be done.” That was said about the business model and demand for gigabit internet. We now routinely do lots of things once believed to be impossible.

One has to translate. When a talented engineer says something is "impossible," it means the speaker honestly believes something cannot be done, because "we cannot, with our known technology, do so."

That might not be the same thing as saying "nobody else can do this."

I once heard a proposal made that a high-definition TV signal could be squeezed into 6 MHz of bandwidth. At that time, it was believed something like 20 MHz or more would be required.

The room literally exploded with verbal disbelief. As it turned out, the proposal was right, and HDTV now is delivered in 6 MHz.

On another occasion, I was quietly informed by some very senior Bell Laboratories engineers that an analog fiber optic access network "could not" deliver 40 cable TV signals, as cable industry engineers were saying was a minimum requirement for cable network fiber optic access systems. The reason for the belief was that lasers capable of doing so could not be produced.

As it turns out, it was entirely possible to produce lasers with characteristics that would allow delivery of 40 channels of analog TV on a single laser, at reasonable distances. When those engineers said "it could not be done," what they meant was that "we cannot do so."

The point is that lots of things we once believed were impossible are, in fact, quite possible. Among those impossibilities is the financial success of single a la carte TV networks, delivered direct to consumers.

Many argued that the business model would not work. As it turns out, that seems to be incorrect. So far, HBO Now, Starz, Showtime and CBS seem to be growing subscription volumes significantly. At some volume, the economics of “going direct” will work.  

source: Business Insider

5G is All About the Business Model

It is quite fair to note that the 5G business case is a work in progress. That is to say, nobody can be quite sure how well suppliers of 5G services will be able to generate significant incremental revenue, beyond “more bandwidth.”

It is true that end users consume more bandwidth every year, and every decade, and that supply (typical consumer network internet access speed) increases about 42 percent every year.

The question is whether internet service providers can monetize that usage, since capacity increases grow faster than incremental revenue. “New technologies mean declining prices, even as capacity grows,” notes Armand Musey, Summit Ridge Group founder.

In other words, if supplying 10 times more bandwidth means 10 times more capex, is there a business model, Musey asks. Beyond that, with use of new untethered and wireless access using unlicensed spectrum, especially indoors, is it at all clear that mobile operators are even the eventual suppliers of most of that bandwidth, asks consultant Bob Horton.

On the other hand, notes Zayo Technologies CTO Jack Waters, technology costs have dropped by orders of magnitude over past decades, so capex requirements per new unit of capacity are not linear.

Still, notes Kalpak Gude, Dynamic Spectrum Alliance president, who pays? In other words, what is the business model for any of the coming next generation networks? “Much of 5G sounds like internet of things, and IoT is mostly going to use fixed access,” Gude argues. “Where’s the value?”

source: Technology Futures

But 5G arguably is different in several ways. It will be the first mobile network generation where incremental revenue will come from non-human customers. And though some remain skeptical, 5G is viewed at AT&T as a replacement or substitute for the fixed network.

In fact, the 5G use case Randall Stephenson, AT&T CEO is “most excited about is the opportunity to have nearly, a nationwide broadband footprint and it could be a fixed line replacement.”

Of those attributes, it is the nationwide, gigabit everywhere angle that is most strategic. Up to this point, though mobile operators have had nationwide coverage, no provider of fixed network services has been able to reach more than a fraction of U.S. households and business locations.

For the first time, 5G means firms will have the ability to reach most customer locations with gigabit internet access speeds, on networks that will take only a few years to build, not decades. Also, regulatory barriers have prevented any fixed network firm from trying to reach nearly 100 percent coverage of consumer locations.

“The capacity is there, the performance is there, there's going to be full gigabit throughput,” Stephenson says.

As you would expect, given the lack of 5G handsets, fixed or nomadic applications and internet access are going to be the earliest-possible opportunities, as was the case for early 4G.

Verizon NG-PON2 Commercial Deployment

Verizon is making large-scale commercial deployments of its new NG-PON2 network in the first quarter of 2018.

“NG-PON2, allows us to converge our many service networks into a single unified intelligent network, and simplify our operating model by integrating the OLT and subscriber management system,” said Vincent O’Byrne, director of technology planning at Verizon.

NG-PON2 is not most notable for its use of multiple wavelengths per optical fiber or its use of tunable lasers in optical line terminals and optical network units, though those are novel, in comparison to older optical fiber access networks.

source: ISE

What makes NG-PON2 different is the ability to use a common cabling infrastructure to create services that are dedicated over discrete wavelengths. In other words, one physical network but multiple virtual networks.

That means a common cabling infrastructure can deliver enterprise, consumer, cell tower backhaul or smaller business services, even wholesale services without the need to overlay discrete optical cables for each type of network.

AT&T Sees Record Low Churn, With Bundles

AT&T now is seeing such low churn rates in its postpaid mobile business and especially with customers on bundles that the “customer life cycle” lengthens. Where accounts in the past might have remained in service for three years or so, AT&T now expects that account relationships could last  eight years, a level previously unheard of for consumer services (mobile, video, internet access). Churn at these levels is implying 100-month and more lives.

Basically, AT&T finds churn cut in half when customers bundle services including either their mobile phone service and gigabit internet access, and often both of those core products.

The company also believes it will see similar benefits for customers bundling video service with other products.

Half a decade ago, for example, mobile subscriber churn  was far higher than it is today. About 2010, monthly churn of two percent to three percent a month among some of the largest four U.S. mobile service providers was not unusual.

source: IP Carrier

source: IP Carrier

That has clear implications for the profitability of accounts, since the rule of thumb is that accounts with longer tenure are higher value, both because such accounts tend to spend more, and also because such accounts represent very low customer service costs.

Research done by Frederick Reichheld of Bain & Company (the inventor of the net promoter score) shows that increasing customer retention rates by five percent increases profits by 25 percent to 95 percent.

forentrepreneurs.com  

Gigabit Demand Now Drives Supply

Never underestimate the power of end user demand, order-of-magnitude price changes and better technology to spur changes in service provider behavior.

Not so long ago, knowledgeable executives in the cable TV and telecom industries doubted the level of consumer demand for gigabit internet access, especially when tariffs were in triple digits.

Randall Stephenson, AT&T Chairman and CEO, now says the company is “laser-focused in 2018 on building the world's premier gigabit network.”

Some might have doubted--given the capital investment--the ability to do so, as some now question the cost to build gigabit 5G networks.  

But the business context has changed. Cost curves for gigabit networks have bent lower. Retail tariffs for gigabit service have dropped by an order of magnitude. And even when most customers do not buy the headline gigabit services, they are upgrading to faster intermediate tiers of service in the hundreds of gigabits per second ranges.

Fiber to home costs, though declining a bit, are not the key change. What has changed is regulator acceptance of the idea that gigabit networks can be built in areas where there is demand, without requiring universal builds at that level.

Also, even when new competitors do not take more than five percent to 20 percent market share in entire markets, those new competitors recreate consumer expectations, driving end user demand for higher-speed services at new price points.

That “build in response to demand” pattern has been a fixture of U.S. telecommunications since the passage of the Telecommunications Act of 1996, allowing competitors for the first time to operate and build their own networks.

The ability to use other platforms--5G fixed wireless, mobile 5G; other forms of wireless or untethered access in combination with mobile access--also promises lower costs. Eventually, many believe, wireless and mobile networks will even rival fixed networks in terms of performance and retail price.  

On the other hand, it would be appropriate to note that the move to gigabit networks is only the foundation, not the goal. For AT&T, in its consumer fixed networks business, internet access by itself does not drive overwhelming amounts of revenue.

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.