Indoor Services Could Drive Many New Revenue Niches

We do not typically think of the internet and mobile business as a matter of “indoor” and “outdoor” business models. Rather, we tend to look at the ecosystem as an “edge provider” and “service provider” dichotomy, or sometimes in a broader context, including chips, infrastructure, devices, apps, connectivity and sometimes other categories such as retail distribution.

The point is that the whole internet ecosystem contains many segments, and opportunities for any stakeholder to grow by occupying adjacent niches. The other issue is that the share of ecosystem revenue might well change, over time. In many cases, growth is not so much the issue as rates of growth.

Still, businesses and revenue built on “indoor” parts of the ecosystem are substantial, and have offered most of the opportunities for businesses that are not tier-one service providers.

That always has been the case, if you think about it. Phone interconnects, value-added resellers, system integrators, venue Wi-Fi, cable TV and the device business all rely principally on solving indoor problems, not “access.”

Many believe such opportunities could grow as new platforms, such as Citizens Broadband Radio Service (CBRS) emerge. CBRS and private LTE could underpin a new wave of business models that drive revenue by solving indoor connectivity problems and create new value propositions.

The existing models include Wi-Fi, local areas networks, the distributed antenna system business, Wi-Fi offload and small cell deployments (which can take carrier, venue or end user forms).  

Boingo says it has 54 distributed antenna system (DAS) venues live, with another 73 venues in backlog. Boingo, which already is heavily in the DAS and indoor venue Wi-Fi business, believes the addressable market for DAS is about 20,000 more locations (in addition to the sites already installed).

While there are five million commercial buildings in the United States, more than 90 percent of those buildings occupy 200,000-square-feet or less, according to the U.S. Energy Information Administration. That might imply that 30 percent, or roughly 1.5 million sites, are the best candidates for lower-cost CBRS systems providing indoor coverage.

In terms of all small cell venues, there are perhaps 400,000 such potential locations where CBRS provides the same benefits as DAS.

So one way of setting parameters is to assume the number of U.S. venues where either DAS or CBRS makes sense ranges from a low of 20,000 locations to a high of 1.5 million locations, with 400,000 possibly representing reasonable CBRS potential.

Boingo’s business opportunities point up the role of indoor mobile coverage in the mobile ecosystem.

But that is not a new issue, since the advent of deregulation and the end of the monopoly era. Since the breakup of the AT&T Bell System, when indoor and outdoor networks were owned by AT&T, “indoor” or premises networking has been the province of private networks owned by consumers or businesses, while “outdoor” networking has been the province of the service providers.

That is why consumers own their phones and PCs, why Wi-Fi exists, why distributed antenna systems and coming in-building small cell networks, as well as private mobile networks, will exist.

Traditionally, service providers have been essentially barred from owning facilities infrastructure, terminating their networks at a demarcation point on the property. Mobility was the new wrinkle, as mobile networks, to be valuable, must provide service everywhere, indoors and outside.

Still, mobile service providers shy away from investing in in-building infrastructure, for cost reasons. Wi-Fi has eased those concerns to a large degree. And some service providers, especially firms such as Comcast, see new value in “owning” the indoor Wi-Fi experience.

So a big new business question is what new opportunities might exist, in the indoor networking environment, for service providers and others in the ecosystem.

Though it now seems “natural,” virtually all the businesses now associated with private networks, end user equipment and software, consumer and business applications, Wi-Fi and other local area networks have been created only as the end of monopoly phone service era began.

Apple’s device business, the Android ecosystem, Wi-Fi ecosystem, local area networks, cable and satellite TV, the phone interconnect and computing system integration and value-added reseller businesses all exist because the public network was deemed to end at a demarcation point on every customer’s premises.

Though in a regulatory sense the rise of Facebook, Google, Amazon and all other app providers (edge providers) was not enabled by telecom deregulation, they were enabled by legal frameworks that left computing services completely unregulated.

To understand why many firms work to create new roles for themselves, consider that, in the monopoly era, AT&T supplied not only connectivity services, but also the network’s equipment and software; the customer equipment (phones) and owned the inside wiring as well as the rest of the network.

In a revenue sense, AT&T made money building and selling infrastructure (as Nokia, Ericsson and others now do); building and selling the CPE (as Apple, Samsung and others now do) and providing all the connectivity (instead of retaining only a fraction of such revenues).

These days, service providers mostly must rely on connectivity revenues alone, in competitive markets, to generate revenue.

So one way to look at efforts to create additional roles in mobile banking; entertainment services; applications and computing is to understand them as ways of recreating the once more-robust involvement in greater portions of the communications ecosystem.

It is not exactly “back to the future,” but it is close.

Historically, only the public network existed. When U.S. consumers or businesses purchased a phone service, the wiring inside the home and the phones were owned by the telco.

That began to change in 1968, when in the Carterphone decision, people gained the right to use their own equipment on the AT&T network.  

With the breakup of the Bell system in 1984, inside wiring became the property of the building or homeowner. That, in turn, lead to the creation of  private networks (local area networks, for example).

The in-building or campus communication systems, equipment and software became the province of private networks. Where in the monopoly era, all customer premises equipment was produced and owned by AT&T itself, today all sorts of companies produce CPE, and AT&T has gotten out of the business of building either network infrastructure products or CPE.

Ironically, the strategic imperative many telcos embrace is an effort to recreate the “multiple roles in the ecosystem” position they once had in the monopoly era.

After 50 years of shrinking roles in the communications ecosystem, major service providers seek to create new roles offering higher revenues, greater profits and diversified revenue streams, as once was the case.

That does not mean firms want to recreate roles in most of the former areas, such as becoming manufacturers of network infrastructure or end user devices. But firms now seek roles beyond connectivity.

Firms whose roles were legally prohibited, curtailed or opened to competition, are trying to find additional and profitable roles in many parts of the ecosystem that were curtailed or forbidden by the deregulation process of the 1980s and earlier.

But indoor coverage and services might well create many new opportunities for service providers and specialists in the ecosystem as well.

What Eventually Takes the Place of Mobile Revenues?

As a rule, I expect that any given communications service provider will have to replace half of current revenue about every decade. Among the best examples (because we have the data) is the change in composition of U.S. telecom revenues between 1997 and 2007.

Back in 1997, nearly half of total revenue was earned from “toll” services (long distance, including international and domestic long distance voice. Profits also were disproportionately driven by long distance services.

A decade later, toll service had dropped to 18 percent of total revenue, while mobile services had risen to about half of total revenues, up from about 16 percent of total.

source: The Economist

A similar trend can be noted for European Union mobile revenues between 2010 and 2018, a period of less than a decade, but still a time when voice revenue dropped from about 80 billion euros to about 45 billion euros, while messaging dropped from about 19 billion euros to perhaps 10 billion euros and mobile internet access grew from about 18 billion euros to perhaps 42 billion euros.

source: FCC

There is some good evidence that computing industry suppliers must replace half of current revenues every 10 years. That is true for chip maker revenues as for computing services providers.

That pattern is clear in telecommunications as well. Messaging revenues provide a good example. Voice revenues provided an earlier example.

source: Chetan Sharma    

Mobile services have been the industry driver for most of the past couple of decades, but new sources still must be found.

The cable TV industry likewise has had to replace about half its revenue over a decade.

Similar trends can be seen at AT&T, where mobile revenues replaced fixed revenues as the big driver of overall results.

source: Deloitte

How Much Net New 5G Revenue Should We Expect?

Service provider revenues from 5G connections will approach $300 billion by 2025, rising from $894 million in 2019, a new study from Juniper Research predicts. That also implies a growth rate of about 163 percent over the first six years.  

If correct, then 5G service revenues would reach 38 percent of total operator billed revenues by 2025.

It always is difficult, though, to make sense of such forecasts, in large part because revenue earned by the next generation platform tends to displace revenue earned from existing platform. In other words, most 5G revenues will cannibalize 4G accounts.

There should be some incremental revenue upside, if 4G provides a template. In other words, it is likely that new 5G services will be sold at some price premium to 4G. In some cases that will be driven by higher prices for mobile 5G. In other cases, higher revenue will come from fixed 5G, which will be prices comparably with fixed internet access services. That could mean per-account revenue that is higher than mobile accounts generally produce.

source: GSMA

In 2025, the 1.5 billion 5G connections will be 14 percent of total cellular connections in the same year, Juniper Research suggests.

Some of us would argue that incremental revenue will be driven by fixed wireless and then internet of things applications. Aggregate 5G revenue figures do not matter as much as the revenue produced by the new services.

For most consumer users, the primary benefit of 5G deployment is going to be that 4G gets more attractive. Very few consumer users will benefit from the ultra-low-latency features of standards-based 5G, and while the headline speeds for mobile 5G will have the same marketing value as gigabit fixed network internet access, virtually no consumer apps require that much speed.

We might find that most consumers are mostly content to rely on advanced 4G for quite some time. If today’s “typical” LTE access speed ranges between 11 Mbps to 14 Mbps, then typical LTE-A might range between 30 Mbps and 40 Mbps.

For any single phone, that is likely to be enough to handle any application a typical person wants to use. So much might depend on what percentage of 5G revenues are driven by new use cases, rather than consumer mobile broadband.

After 50 Years of Shrinking Roles, Telcos Try to Grow

After 50 years of shrinking roles in the communications ecosystem, major service providers seek to create new roles offering higher revenues, greater profits and diversified revenue streams, as once was the case.

That does not mean firms want to recreate roles in most of the former areas, such as becoming manufacturers of network infrastructure or end user devices. But firms now seek roles beyond connectivity.

Firms whose roles were legally prohibited, curtailed or opened to competition, are trying to find additional and profitable roles in many parts of the ecosystem that were curtailed or forbidden by the deregulation process of the 1980s and earlier.

Though it now seems “natural,” virtually all the businesses now associated with private networks, end user equipment and software, consumer and business applications, Wi-Fi and other local area networks have been created only as the end of monopoly phone service era began.

Apple’s device business, the Android ecosystem, Wi-Fi ecosystem, local area networks, cable and satellite TV, the phone interconnect and computing system integration and value-added reseller businesses all exist because the public network was deemed to end at a demarcation point on every customer’s premises.

Though in a regulatory sense the rise of Facebook, Google, Amazon and all other app providers (edge providers) was not enabled by telecom deregulation, they were enabled by legal frameworks that left computing services completely unregulated.

To understand why many firms work to create new roles for themselves, consider that, in the monopoly era, AT&T supplied not only connectivity services, but also the network’s equipment and software; the customer equipment (phones) and owned the inside wiring as well as the rest of the network.

In a revenue sense, AT&T made money building and selling infrastructure (as Nokia, Ericsson and others now do); building and selling the CPE (as Apple, Samsung and others now do) and providing all the connectivity (instead of retaining only a fraction of such revenues).

These days, service providers mostly must rely on connectivity revenues alone, in competitive markets, to generate revenue.

So one way to look at efforts to create additional roles in mobile banking; entertainment services; applications and computing is to understand them as ways of recreating the once more-robust involvement in greater portions of the communications ecosystem.

It is not exactly “back to the future,” but it is close.

Historically, only the public network existed. When U.S. consumers or businesses purchased a phone service, the wiring inside the home and the phones were owned by the telco.

That began to change in 1968, when in the Carterphone decision, people gained the right to use their own equipment on the AT&T network.  

With the breakup of the Bell system in 1984, inside wiring became the property of the building or homeowner. That, in turn, lead to the creation of  private networks (local area networks, for example).

The in-building or campus communication systems, equipment and software became the province of private networks. Where in the monopoly era, all customer premises equipment was produced and owned by AT&T itself, today all sorts of companies produce CPE, and AT&T has gotten out of the business of building either network infrastructure products or CPE.

Ironically, the strategic imperative many telcos embrace is an effort to recreate the “multiple roles in the ecosystem” position they once had in the monopoly era.

Why 5G Capex Has to be Contained

It is reasonable to expect some uptick in mobile service provider capital investment as suppliers begin building 5G networks. It is, despite worries to the contrary, unlikely that the increased capital investment will require a doubling, tripling or some other huge increase in spending , as some have feared.

In fact, Three UK and Swisscom executives now say 5G investment will be “flat,” in relationship to existing levels.  

Credit open source, Moore’s Law, facilities reuse, spectrum aggregation, new spectrum, unlicensed spectrum, small cells, virtualization, software defined networks and use of commodity servers as innovations that actually reduce capex requirements, even as performance is boosted.

In other words, the amount of capital required to build new networks often is less than using legacy platforms and technology.

The other big constraint is that returns on deploying capital are less than in past years. Put simply, investing a unit of capability produces revenue at a fraction of that investment. In recent years, in every geography, there is about an order of magnitude less revenue produced for each unit of capex deployed.

That creates huge pressures on service providers to better match investments with investment return. That is one good reason why 5G capex might be far more restrained than many expect.

source: Subex

The new 5G networks must be built, of course. But how they are built, when and where, will be more strategic than in the case of past networks, one might argue. The reason is simply that the business model might be far more challenging than in the past.

So capex will have to be scaled to match expected financial return. And that will put constraints on the amount of investment.

Indoor Space Business Models Could Change in 5G Era

Indoor space has been a big coverage issue for mobile operators, and has created space for Wi-Fi to become a key part of access infrastructure. But indoor space might create new business opportunities in the 5G era, when indoor coverage options increase and change.

Incentives for switching access to Wi-Fi might change for reasons beyond faster speed and cost savings. For the first time, some users might prefer to stay on the mobile network because their virtual network features and privileges are lost when switching to Wi-Fi.

Also, the ability to bond mobile and Wi-Fi spectrum seamlessly will provide additional incentives to simply remain connected to the mobile network when indoors, assuming indoor coverage is sufficient to maintain the mobile signaling network connection.

Indeed, some argue 5G will start to shift access back towards mobile networks. In the 3G era, users switched to Wi-Fi at times because it did not apply against their usage allowances, and in part because Wi-Fi tended to offer faster access than did the 3G network.

That changed in the 4G era, when Wi-Fi generally became slower than the mobile network.

In the 5G era, there is likely to be more use of the mobile network, in part because of spectrum aggregation. Tariffs and usage allowances also will make a difference.

In the 5G era, it is conceivable that Wi-Fi offload will happen less than it did in the 3G and 4G eras.

source: Cisco  

That might be aided by a number of other changes, beyond 5G usage allowances and tariffs. Indoor coverage by small cell might include access to virtual networks that offer consumers of business users network features not available on the Wi-Fi network, and enabled by network slicing, for example.

If, for example, network slicing is used to create differentiated speed tiers (gold, silver, bronze) plans, mobile customers will lose the advantage of their premium plans when switching to Wi-Fi.

If one assumes outdoor space will be the place where mobile coverage is most valuable, indoor space will remain a more-contested arena where access options will be more diverse, where third parties will have a greater role, where the ability to support private network features at the indoor edge will open up new possibilities for end users, mobile operators and third parties.

Does Broadband Increase Home Values?

There is an apparently-direct correlation between use of broadband internet access services and the general level of economic development in any country.

source: Springer.com

In other words, household income and use of higher-speed internet access is directly correlated.

source: Brookings

So it is perhaps not unusual that some try and establish a causal relationship between deployment of broadband facilities and economic growth, home prices or income.

Some believe that access to a fiber-to-home internet access connection can increase home value as much as three percent.

The Fiber Broadband Association also claims gross domestic product is higher where gigabit internet access is available.

Likewise, the association claims that optical fiber access increases the value of multiple dwelling units.

Most would likely agree that a correlation between home prices, economic health and internet access is logical. Perhaps few of us really believe internet access “causes” either higher home prices or economic growth. In fact, it might be more logical to argue that areas with h stronger economic growth drive job growth and average wages, which in turn drive higher average household incomes; higher discretionary income and therefore higher demand for gigabit and higher-speed internet access.

In other words, correlation is not causation. And if there is causation, wealthier consumers may drive demand for more-expensive internet access. That, in fact, is precisely the model Google Fiber, AT&T and many independent internet service providers have done, when marketing.

ISPs deploying gigabit access have deliberately selected wealthier neighborhoods, where demand is strongest.

To be sure, virtually nobody would discount the value of high-quality broadband access, anymore than observers would question the value of wastewater, clean water, electrical services, roads, airports or railways.

What is not clear is a causal relationship between utility, transportation and communication services and economic growth, housing prices, average wages or job creation. “Necessary but not sufficient” is a reasonable assumption.

source: Blandin Foundation