Thursday, September 13, 2018

Existential Crises Brewing in Internet Ecosystem?

Some have argued that 5G fixed wireless is an existential threat to cable TV and some telco fixed network service providers. That might turn out to be mistaken.

But more firms in the internet ecosystem might face similar existential problems in the future, for reasons either of business strategy or government intervention.

By definition, an existential problem is one that threatens the survival of the entity. And that is where strategic decisions matter, as a common rule of thumb is that a firm or entity facing an existential crisis might well have to consider fundamental changes and adaptations. “More of the same,” in other words, does not typically work.

But “more of the same” might be exactly the broad choice most service providers ultimately will make, simply because rival paths are unfeasible.

Some applaud Verizon’s apparent continued focus on the quality of its network and connectivity services, as opposed to other strategies that might reduce reliance on connectivity revenues.

Others think that is risky. Tier-one app, device or platform providers seem to be evaluating, testing entry into the connectivity business on a bigger retail level, or might well do so in the future. The simple reality is that bigger firms acquire smaller firms, and many tier-one platform, app or device firms have market values far in excess of even the largest tier-one telcos, mobile operators and cable operators.

Apple, for example, is the latest to be moving into a potential connectivity role. Google and Facebook already have developed technologies for communications, and Google Fiber of course already is a connectivity services provider.

So the big question is whether most communications service providers should “stick to their knitting” and be the best communications providers possible, or whether sustainability requires moves elsewhere in the ecosystem (“up the stack”).

Both strategies ultimately are likely to be chosen, by different providers with varying abilities to execute on a diversification strategy.

To be sure, in a developing area such as internet of things, connectivity revenue will grow, perhaps substantially. But upside is almost certain to be higher in the applications and platform areas.


Most service providers ultimately are going to choose to focus on connectivity services, even if that eventually means huge consolidation in the service provider space, as surviving firms seek to bulk up, gain scale, boost gross revenues and prop up profit margins.

A relative few will have the resources to diversify revenue sources beyond connectivity (Comcast, AT&T, NTT, SingTel, Orange, DT already are trying). Verizon’s strategy seems to be “focus on connectivity,” after a period where it tried without huge success to create a bigger role in content services.

And we might be premature in suggesting Verizon really believes it can sustain revenue and growth on the strength of connectivity services.

Of course, Verizon and other service providers are not alone in facing what might  be existential business problems. Even if it is easier to see that virtually every legacy telecom revenue stream has past its peak, it now looks as though many leading internet app platforms and app provider face their own huge problems, namely of the antitrust sort.

Wednesday, September 12, 2018

Mobile Data Prices Plummet in Africa and India

As a long term trend, communication costs have dropped, and likely will continue to drop, for a number of reasons:
  • Moore’s Law
  • Better technology (mobile, fixed, device, radios and network infrastructure)
  • Competition
  • Manufacturing efficiencies

The impact also can be quite substantial over short periods of time. Consider the retail price of mobile data in Asian and African countries over the past several years. Where mobile data in 2015 might have eaten up four percent of monthly income in Nigeria, gby 2017 mobile data had fallen to consume about 0.75 percent of monthly income.


Computing Eras Always Shape Communications Demand

Changes in computing nearly always have implications for communications and connectivity providers. In the mainframe era there was some need for lower-speed connections to connect remote locations to computing centers.

The client-server era created the need for local area networks, and arguably had some demand consequences for connecting computing centers with branch offices. But it was the shift to cloud computing which really drove the demand for connecting not just computing centers and branch offices, but consumer devices.

The coming era of edge computing should shift demand again, reducing demand for long haul connectivity but increasing demand for metro-area communicatiions.



India and China Drive Mobile Account Growth to 2025

As always, global trends can obscure what is happening in discrete communications markets.
That seems to be the case for mobile communications as well. Of the 1.6 billion new mobile internet users between now and 2025, the overwhelming numbers will come from China and India.

Just five countries account for half of global  growth to 2025:
  • China
  • India
  • Indonesia
  • Nigeria
  • Pakistan

What that means is that subscriber additions cannot drive revenue growth in most markets globally. In many countries, additional mobile data revenue will be key. In developed markets, growth will have to shift beyond mobile data, one might argue.

Also, because fixed broadband is negligible in some of those markets, the “next internet generation will not just be mobile first, but mobile only,” says GSMA.

U.S. Regulatory Threat to Internet App Giants Grows

For better or worse, the U.S. Federal Trade Commission is kicking off  a series of public hearings during the fall and winter 2018 examining whether broad-based changes in the economy, evolving business practices, new technologies, or international developments might require adjustments to competition and consumer protection law, enforcement priorities, and policy.


In other words, this might be the precursor to regulation of internet app firms in new ways, possibly including measures of an antitrust nature (breaking up firms or restraining them). The FTC has broad authority to promote competition in U.S. consumer markets.


Hearing
Date
Topics
Location
#1
Review of Competition and Consumer Protection Landscape; Concentration and Competitiveness in U.S. Economy; Privacy Regulation; Consumer Welfare Standard in Antitrust; Vertical Mergers
Georgetown University Law Center, Washington, DC
#2
State of U.S. Antitrust Law; Mergers and Monopsony or Buyer Power
FTC Constitution Center, Washington, DC
#3
Oct. 15-17, 2018
The Identification and Analysis of Collusive, Exclusionary, and Predatory Conduct by Digital and Technology-Based Platform Businesses; Antitrust Framework for Evaluating Acquisitions of Potential or Nascent Competitors in Digital Marketplaces; Antitrust Evaluation of Labor Markets
George Mason University Antonin Scalia Law School, Arlington, VA
#4
Oct. 23-24, 2018
Innovation and Intellectual Property Policy
FTC Constitution Center, Washington, DC
#5
Nov. 6-7, 2018
Privacy, Big Data, and Competition
American University Washington College of Law, Washington, DC
#6
Nov. 13-14, 2018
Algorithms, Artificial Intelligence, and Predictive Analytics
Howard University School of Law, Washington, DC

Verizon Launching its 5G Fixed Wireless Service

Verizon is launching Verizon 5G Home on October 1 in parts of Verizon 5G Home (a fixed wireless service) will initially be available in parts of Houston, Indianapolis, Los Angeles and Sacramento, providing the first U.S. real-world test of customer demand for 5G fixed wireless, and a test of how much fixed network internet access market share might be disrupted.

Verizon 5G Home customers should “expect typical network speeds around 300 Mbps and, depending on location, peak speeds of nearly 1 Gig, with no data caps,” Verizon says. The obvious importance is that the fixed wireless service now offers speeds quite comparable, if not better, than service provided by cabled network providers in the markets Verizon is targeting, and matches--if not exceeds--the usage allowances incumbent suppliers provide.

Perhaps significantly Verizon says “Verizon 5G Home is ideal for consumers looking to ‘cut the cord’ or upgrade from their current cable service.” That suggests Verizon believes it will win most of its customers from other cable providers. Given that cable speeds arguably are faster than the competing telco’s offers in most of those initial markets, one might suspect that many of the switchers would come from those customers buying the slower speeds.

Verizon likely believes that if those customers wanted to upgrade, they already would have. And that makes the key competitor the cable operator, which serves customers with an arguable demand for faster internet access service.

After that introductory period, current Verizon Wireless customers with a qualifying smartphone plan will pay $50 per month for the service, while non-Verizon Wireless customers will pay $70 per month. This monthly charge includes all taxes and fees, and does not require an annual contract. There are no additional hardware costs, Verizon says.

There are a couple of noteworthy points here. Verizon seems to have concluded that consumers like the “no hidden charges” approach, as most other ISPs likely charge taxes and fees on top of the recurring service payments.

Verizon is not requiring a contract, which most cable operators do, when offering their best pricing. Also, Verizon is not charging for customer premises equipment, which is a typical cable requirement.


5G Home customers will also get YouTube TV free the first three months ($40/month thereafter) and a free Apple TV 4K or Google Chromecast Ultra device at installation. U.S. consumers can visit FirstOn5G.com to learn more.

Tuesday, September 11, 2018

Is 5G an Existential Threat to Fixed Network ISPs?

Even if you do not completely agree with the claim that “5G technologies are expected to put mobile broadband on par with fiber networks,” most might agree that the gap between mobile and cabled access networks is about to close dramatically. Nobody yet knows how much share shift (mobile substitution) could happen. But the threat is substantial, at a local level.


“We see 5G fixed wireless broadband as the biggest existential threat to broadband providers (by far),” say equity analysts at Cowen. Mobile 5G might be a bigger threat, but consider only fixed wireless.


Consider what Verizon might achieve, as it is the U.S. tier-one service provider most committed to 5G fixed wireless. Verizon assumes it might eventually reach 30 million to 35 million homes (homes passed) in 17 or so potential markets.


Assume that total fixed network internet access take rate in those markets is 85 percent. That implies perhaps 25.5 million to 29.8 million customer accounts in the total market.


Assume the cable competitor in those markets has 55 percent share, while the telco has 44 percent share. That implies cable operators have perhaps 14 million to 16.4 million accounts.


Other telcos (mostly AT&T and CenturyLink) might then have 11.2 million to 13.1 million accounts.


Assuming a 25 percent Verizon take rate when it enters those new markets, Verizon could eventually expect to gain 6.4  million to 7.5 million accounts.


To be sure, on a national level, those losses, while unwelcome, represent a share shift in low single digits for any affected incumbent supplier. On a national base of at least 97 million accounts, that amount of share shift represents about seven percent to nine percent of the base.


The impact really is on local market business cases. If the incumbent losses come in proportion to existing share, then the local cable company could lose 14 percent share, while the telco loses 11 percent share.


In other words, cable might lose two million to 2.3 million accounts in those markets, while telcos lose 1.2 million to 1.4 million accounts. That drops cable share to perhaps 41 percent, and telco share to perhaps 33 percent share.


At a high level, neither of those new share levels is unsustainable, the general logic being that a minimum of 20 percent ISP share is sustainable. But the lower share makes the overall business case for cable and telco suppliers that much tougher, reducing gross revenue, profit margins and possibly average revenue per account.


That is hugely important, as it could dramatically alter the business case for fiber-to-home or other access networks, reducing the number of instances where such a network is sustainable.

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