Millimeter Wave Could be Revolutionary

It is easy to underestimate the impact of commercialized millimeter wave spectrum. Since supply and demand always matters in any market, the sheer amount of millimeter wave spectrum, as well as its cost, is going to enable new business strategies.

The impact will be intensified as well by other related developments (small cells, spectrum sharing, massive multiple-input multiple output radios, better modulation techniques) that will greatly expand spectrum availability and also lead to lower prices for spectrum.

Though it is generally underestimated, millimeter wave spectrum and the other associated technology trends will enable wireless networks--for the first time--to directly challenge fixed networks for internet access customers, with features that are at least as good as fixed networks (and sometimes better), and with retail pricing that also is comparable.

Conversely, that is going to be a key business model challenge for tier-one operators of fixed access networks, which might well see accelerated market share loss, and greater stranded asset problems for their fixed network operations.

That is worth keeping in mind as Verizon readies its 5G strategy. Verizon has the smallest fixed network footprint among tier-one internet access suppliers in the U.S. market.

Comcast passes (can actually sell service) about 54 million homes. Charter Communications passes some 50 million home locations.

AT&T’s fixed network passes perhaps 62 million U.S. homes. Verizon, on the other hand, passes perhaps 27 million locations.

What that means is that Verizon has a clear interest in using 5G fixed wireless to expand its addressable market by more than 35 million U.S. homes that it cannot reach today, giving Verizon a fixed network footprint that is comparable to its key rivals.

And that attack will be based on use of 5G millimeter spectrum and fixed wireless mode. That might make Verizon a rarity in the U.S. market: a tier-one service provider that actually can earn lots of incremental 5G revenue by taking fixed internet access network share away from other key competitors.

Many observers believe 5G will rely mostly on 5G value for internet access, in the early years.

For the most part, though, it is likely that all mobile operations will largely replace 4G accounts with 5G accounts, offering some incremental new revenue, but not too much.

But even if 5G does not immediately lead to huge new revenue streams and new internet of things and ultra-low latency use cases, it is likely to enable a key near-term Verizon growth strategy, namely growth by taking market share now held by competitors in fixed network internet access markets.

While that might not address other long-term issues, taking market share is a proven way for attackers to boost growth and revenues in the near term. That is precisely what cable TV operators did in voice, are starting to do in mobile services what some telcos now are doing in video (both access and content).

Long term, gaining additional market share in internet access does not address what Verizon and other service providers must do to replace shrinking revenues in their legacy connectivity and linear video subscription businesses.

Nor does that same strategy make as much sense for Verizon’s other fixed network competitors. Comcast is focused on international growth; AT&T on content and other “up the stack” opportunities, with some international growth; Charter Communications has to upgrade its access networks and figure out what to do about “up the stack” content or other growth strategies.

Sprint and T-Mobile US do not have the resources or will to do much more than try and gain share in the core mobile business, for the time being. CenturyLink already has made a huge transformation into an enterprise services company with a big legacy consumer telecom business.

The point is that there is no single, universal strategy for 5G. Each company will move ahead based on its perception of other elements of its growth strategy.

Amazon Alexa, Echo Enable Voice-Controlled Speakerphone

Amazon's Alexa app and Echo voice appliances can be used to make (no incremental cost) voice calls to other Alexa users and devices, showcasing one more way voice over Internet Protocol has become a substitute for legacy calling.  

Alexa also can call “most phone numbers in the United States, Canada and Mexico” as well, essentially turning the Echo device into a voice-controlled speakerphone.

As is common with VoIP services, there are some limitations. There is no support for “911” emergency calls, premium-rate numbers (“1-900” numbers or other toll numbers, abbreviated dial codes (“211,” “411,”), dial-by-letter numbers (e.g. “1-800-FLOWERS”) or international calls to countries other than the United States, Canada and Mexico.

Of course, there is more than substitution going on. As legacy carriers move to replace their own calling services with IP platforms, some amount of former legacy voice then might be counted as part of the “VoIP” category.

But the largest impact is substitution, a process that occurs elsewhere in the telecom market. Consider demand for international bandwidth. In the early decades of the internet, “IP transit” was a product that service providers and transport providers bought and sold to move internet traffic, in addition to wholesale capacity of other types.

These days, much of the “public market” has essentially vanished, as major app providers and enterprises build and operate their own networks, obviating the need to buy capacity services from a service provider.

On routes across the Atlantic Ocean, such private networks carry 70 percent of all IP traffic. On Pacific crossings, private networks carry nearly 60 percent of traffic. On routes within Asia, private networks carry 60 percent of traffic.

The point is that IP-based apps and services cannibalize demand for existing services. That is as true for undersea capacity as it is for voice and messaging services.

source: Telegeography

U.S. Rural Customer Coverage Might Change in Big Ways in Future

The extraordinarily high cost of reaching the couple percent of most-isolated U.S. households is one reason why alternatives ranging from 5G to fixed wireless to Google Loon, Facebook Aquila, Google Wing or new constellations of low earth orbit satellites really have to be looked at, as much as existing incumbents might prefer that not be done.

It would not be uncommon in rural areas for fiber to home networks to cost $17,400 per location, according to CostQuest Associates, which produced a recent report that makes the case for federal subsidies for broadband infrastructure.

“The capital investment per customer location, for conduit and poles, is approximately 5.6 times higher in rural areas as in suburban areas,” CQA estimates. “For fiber optic cable, the capital investment is approximately 4.2 times higher in rural areas as in suburban areas.”

The issue is whether any of the newer platforms, including 5G, fixed wireless, unmanned aerial vehicles or constellations of balloons or low earth orbit satellites are commercially viable.

A recurring issue, of course, is which entities should be eligible to apply for such subsidies. In the past, and at present, legacy fixed network providers have been prioritized for federal subsidies, although in the past mobile operators have, in some cases, been eligible to apply for subsidies designed to promote investment in high-cost areas.

But subsidies have used a mix of approaches, including cross subsidies. In the past, revenues earned from urban areas were used to support service in rural areas. Revenues and profits from business users were applied to consumer communications.

High-profit long distance subsidized  local service. In addition, the federal government has provided direct support for high-cost areas. The Rural Utilities Service also has provided ost grants and low interest loans, while states have run their own universal service funds.

All of that is breaking down since the traditional “high profit” sources are dwindling in the competitive era.

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The other issue, though, is the impact of competition on the business model, no matter what network platform is chosen. Take rates, especially when customer density is lower than about 10 homes per linear mile, have a major impact on capital investment.

CostQuest Associates

The point is that very-remote locations might simply be unfeasible to connect using fiber-to-home platforms, even with subsidies, and have typically been candidates only for satellite internet (geosynchronous or low-earth or medium-earth orbit).

Moderately-remote areas might be candidates for any number of existing and new platforms.

Can Most Telcos Replace 1/2 of Revenue in 10 Years?

AT&T first quarter revenue trends over the past three years have been worrisome. And that is why moves such as the Time Warner acquisition, and potentially the AppNexus buy, are so important.  

In the first quarter, over the last three years, revenue has fallen. And though free cash flow held up in 2016 and 2017, it dipped in the first quarter of 2018.

AT&T is not different from most other service providers in developed markets, in the sense that every legacy revenue stream is shrinking. With markets saturated (fixed and mobile services and customer segments), it is somewhat obvious that revenue growth has to be sought elsewhere.

So though debt levels are a clear issue, most tier-one service providers who hope to prosper over the next decade or two virtually must spend significant resources in the effort to create brand new revenue drivers, with scale.

Time Warner helps AT&T, in the near term, much as NBCUniversal has helped Comcast. The AppNexus acquisition is a more risky, but with outsized returns, if the AT&T strategy works. What AT&T says it wants to do is create a big ad exchange platform that can rival Google and Facebook.

So the potential upside is clear enough. The challenges arguably are even greater, but the need to replace as much as 50 percent of current revenues over the next decade are reason enough for bold moves. That might sound like hyperbole.

It actually is history. U.S. service providers, for example, have had to replace that much revenue at least once or twice over the last couple of decades. The first big change was the replacement of long distance revenues with mobile revenues. The second big change (and more recent) was the replacement of mobile voice and texting with mobile internet.

But there is little reason to believe the underlying trend will change. Many tier-one service providers will have to replace as much as half their present revenue with new sources in 10 years. One might argue they will have to do so every 10 years.

source: Seeking Alpha

source: Seeking Alpha

Is Business Connectivity Spending Growing?

The 5G era might represent a significant change in telecom market dynamics. Where consumer demand for internet access arguably has driven revenue growth for the past couple of decades, growth might shift to enterprise and business users.

The reasons are several. Though nearly all connectivity markets are competitive, and face pressures to reduce prices, almost continually, cloud computing and internet of things arguably will increase demands for business connectivity, virtually across the board.

On the other hand, substitution effects never can be discounted. Nor can we discount the growing ability to substitute lower-cost computing platforms for higher-cost platforms, which means quality goes up even as costs remain flat or even decrease. That means spending levels do not always linearly relate to demand.

And it always is difficult to tell whether U.S. business spending on telecommunications is growing or shrinking, in part because different forecasters use different definitions of what “telecom spending” includes. Nevertheless, several analysts now predict steadily-growing U.S. business spending on telecommunications.

source: Forrester Research

With the caveat that “North America” often includes the United States and Canada, or, perhaps as appropriately, those nations plus Mexico, spending on communications services seems to be on an upward trajectory.

source: Statista

source: Gartner

Online Ad Market: Many Challenges

Online advertising markets face significant long-term challenges, including growing demands for privacy that will have the practical effect of raising operating costs for ad platforms. That trend has been a threat since the rise of ad blockers, is raised by new data privacy rules and might evolve again if blockchain and other approaches to user ownership of data actually become ubiquitous.

But challengers also will not stop trying to unseat Google and Facebook, either.

AT&T hopes to create a viable ad exchange platform for advertisers who want an alternative to Google and Facebook. Verizon hopes to do the same, with less universal scope. In that regard, a number of other app providers also hope they can become the third option to Google and Facebook. And that list of would-be contenders includes Amazon and Twitter, for example. So it will not be easy for any contender to emerge as a significant third alternative.

source: Visual Capitalist

According to at least one new survey, consumers tend to see Google and Facebook as the most influential ad platforms. Facebook (54 percent) and Google (44 percent) were cited by consumers as the most influential platforms for advertising.

Instagram (23 percent), Spotify (28 percent), and Pandora (24 percent) followed Google and Facebook.

Some 43 percent of respondents felt negatively towards advertisements, compared to a similar survey from April of 2017 where only 34 percent reported a negative sentiment. So digital platforms perhaps are making some of the same mistakes linear video advertising channels have made, namely showing too many ads.

Will Autonomous Vehicles Increase Video Consumption?

The video entertainment business is not what it used to be. The receiving device once was a television. These days mobile phones, game consoles, personal computers or tablets also are used, and with increasing frequency.

But the range of use cases (and therefore “devices”) might eventually include a much-greater number of use cases. And at least some tier-one service providers believe automobiles, especially autonomous vehicles, will be added to the list of venues.

source: Marketing Charts

In the 5G era, where neither latency nor bandwidth will be barriers, use of self-driving vehicles will become possible.

And though many of the use cases are expected to begin with long-haul trucking, autonomous vehicles will create yet another new venue for “watching video.”

“If you’re not driving yourself to and from work to and from Los Angeles anymore, you can sit in the back seat and let the vehicle take you, what do you get?” asks John Stankey, AT&T Warner Media CEO. “You get another hour or two hours to consume great content that you build every day.:

So the autonomous automobile gets added to the venues and devices where video entertainment is consumed. Just as significantly, the hours per day envelope potentially gets bigger, one might argue.

Of course, it also is possible that people simply shift some amount of viewing from other venues to the “auto.” It also is possible that although the venue changes, the device does not. It is obviously possible that some amount of PC, tablet or smartphone video consumption simply gets shifted from a tethered use case (inside a home) to a mobile use case (in a moving vehicle).

Either way, mobile service providers might see upside. So too might content suppliers and advertising platforms also see gains from increased amounts of usage.

source: Tubular Insights  

source: Tubular Insights  

“Why am I bullish on building more content?” Stankey says. “Well, I think that the average number of hours that an individual consumes in a given day might actually increase somewhere in the range of an hour to an hour and a half over the course of the next four years because of that shift.”

And several sorts of shifts could happen: more mobile, more vehicular consumption, more mobile advertising avails, different content formats or display parameters (vertical, not just horizontal aspect ratios, to support smartphone consumption).

source: eMarketer

In the advertising area, we have been accustomed to the idea that billboards and other forms of outdoor, out of home or place-based and transient advertising, but generally not video as the media type used.

But as smartphones increasingly become media consumption devices, so does out of home or outdoor advertising change. The screen is in the purse or pocket, and is as mobile as the human using that device.

It might take some time, but owning Time Warner might allow AT&T to create a new venue for content consumption and advertising.