SD-WAN Interest Seemingly Jumps in 1 Year

About 46 percent of information technology executives surveyed by Cato Networks indicated that they had, or were considering, deploying SD-WAN in 12 months, up from about 25 percent with such intentions in 2018.

Another 33 percent of respondents are considering SD-WAN but have no current plans to deploy the technology.

The primary motivations for considering SD-WAN include:

• Improved Internet access (46 percent)
• bandwidth (39 percent)
• improved last-mile availability (38 percent)
• excessive WAN related costs (37 percent).

As argued by Cato Networks, the advantages of SD-WAN over MPLS include:

• Secure, direct Internet access from branch offices
• Predictable, responsive global application performance without
• Lower cost than MPLS
• Easy and affordable optimized cloud access
• Optimized and secure mobile experience worldwide

But connectivity providers (telcos) still seem to face mixed reviews from enterprise users.

Respondents said  telcos provide “average service level.”

“There is nothing about our telco which makes us like or dislike them, they are just ‘as expected,’” Cato Networks summarizes.

On a numerical ranking, telcos got ratings of 54 out of 100, when respondents were asked if they thought network service pricing was fair.

On other measures telcos arguably scored better. Respondents gave high marks for the overall

experience with cloud providers (3.71 for cloud application providers, 3.70 for cloud datacenter providers), while global telcos scored 3.24.

Cato Networks calls that performance by cloud service suppliers “high,” while telcos scored “lowest.” It is not possible for me to determine how significant those differences are, as Cato did not provide the range of possible scores. I would guess the range was 1 to 5. In that case, though telcos scored lower, the difference between cloud providers and telcos, while clear, might not be a gulf.

Revenue Per Square Mile: Population Density Really Matters

The relationship between population density and network investment is clear in this table illustrating revenue per square mile for a fixed network supplying internet access at $50 per month.

Area	Population (people/mile2)	Household Income (median, 2017)	Broadband Adoption	Revenue per mile2
Manhattan, New York	69,467.5	$85,071	81.9%	$347,337.50
City of Chicago	11,841.8	$55,295	73.5%	$59,209.00
Santa Clara County, CA	6,327.3	$106,761	89.4%	$31,636.50
City of Palo Alto, CA	2,696.5	$147,537	91.3%	$13,482.50
Carbon County, PA	171.1	$51,236	74.4%	$855.50
United States	87.4	$60,336	78.1%	$437.00
Campbell County, WY	9.6	$80,178	86.4%	$48.00
Loving County, TX	0.1	$ 80,938	64.5%	$0.50

source: Forrester Research

5G Fixed Wireless Could Reverse a 20-Year U.S. Trend

There are roughly 99 million fixed network internet access accounts active in the U.S. market. If fixed wireless manages to shift about 12 million accounts, that is a potential gain of 12 percent.

If 80 percent of that shift is from cable operators to telcos, implying a shift of 9.6 million accounts, that would mean a loss of 15 percent cable TV market share in internet access.

Where cable operators now have some 66.3 million total accounts, they would drop to about 57 million customers.

Where U.S. cable operators have 66 percent market share, they would wind up with 53 percent share. Telco market share would grow from 34 percent to 44 percent.

If virtually all the losses came from cable, and went to telcos, cable would have 56.7 million accounts, telcos who now count 33.5 million subscribers would grow to 43 million accounts, or about 46 percent.

source: Business Insider

That would reverse a nearly 20-year trend of cable operators taking market sharein internet access.

Marginal Cost (Near-Zero) Pricing is a Major App Provider Advantage

“Near-zero pricing” (or the perhaps-better known expression of “marginal cost pricing”) is a business principle that underpins and complicates business strategy in a wide range of industries, ranging from internet apps to computing; retailing to media; communications and consumer electronics.

Marginal cost is a universally accepted pricing principle, representing the incremental cost to produce one more unit. The key idea is that it is profitable to keep producing additional units right up to the point where marginal cost and marginal revenue hit zero. At that point, one stops producing, as losses will occur.

But physical goods and digital goods have different marginal cost curves. For a communications service provider, at some point there is so much demand that a network has to be upgraded. That adds capital investment cost, so the marginal cost actually has to rise.

Digital products are different. Once the original is created, the marginal cost can actually remain infinitesimal, even with vastly-greater usage. That also implies that retail price can be very close to zero, and still yield a profit.

In fact, some believe zero marginal cost might be among the most-important business drivers in the early 21st century, though the idea remains controversial.

A company that is looking to maximize its profits will produce “up to the point where marginal cost equals marginal revenue.” In a business with economies of scale, increasing scale tends to reduce marginal costs. Digital businesses, in particular, have marginal costs quite close to zero.

source: Praxtime

In other words, the incremental cost of adding one more Gmail user or one more Facebook user are infinitesimally small.

But marginal costs also are immeasurably small even in some industries with high capital intensity. What, for example, is the incremental cost to supply one more megabyte of internet access capacity; one more minute of voice usage; one more text message, on a network that already is built and operating?

To be sure, additional sales help most businesses, digital or physical.

source: Barbara Hoisl

But the danger of pricing at marginal cost (increasingly a price very nearly zero) is that “where there are economies of scale, prices set at marginal cost will fail to cover total costs.”

Think of the “sunk cost” of building a mobile or fixed network. Retail pricing has to be set at a level that allows recovery of that initial network cost, plus profit. So overall pricing cannot be set at the marginal cost of the last units, but at a rate including recovery of sunk costs.

Add to that the possibility that product prices for the end user also include revenue generated by third party partners (advertisers, retailers on a platform) and end user consumption can actually be subsidized.

The point is that even if the incremental cost of supplying one more megabyte of data consumption, one more minute of a voice call or one additional text message is quite close to zero, a service provider cannot price at marginal cost, forever.

That accounts for the business advantage many app, content and services providers hold over a facilities-based connectivity provider selling apps and services. An over-the-top app provider does not have to recover a physical network’s sunk costs.

Mobile and Internet Subscriber Counts Can Drop, as Well as Rise

It is not easy to explain why the number of mobile and fixed network subscribers in India has been falling over the past two year . There are major share shifts--Reliance Jio gaining, virtually every other supplier losing--but the issue is that total accounts are reported to be dropping.

There are some statistical issues. It is possible that many users now do not need to buy multiple SIM cards, as a result of lower tariffs driven by Reliance Jio. But promotional activity has subsided as well, and that likely means incremental, cost-sensitive users are not being added at the former rate.

Also, Telecom Regulatory Authority of India counts each SIM as a subscriber. At least a couple of the leading mobile providers count “accounts” differently.

source: TRAI

There also might be a growing amount of mobile substitution, where mobile broadband displaces fixed broadband use. That seems to be happening elsewhere.

source: Quartz India

Is 2019 the Year of Peak Satellite?

It appears 2019 could be the peak year for satellite TV services globally, as Rethink Technology Research believes subscribers will begin a permanent decline in 2020, with a loss of about 15 million accounts by 2024, on a current base of about 225 million.

Still, that represents a cumulative loss of about six percent to seven percent over five years, a rate of attrition executives in the telecom industry have dealt with before. In other words, the transition away from linear TV services--using fixed or satellite networks--will be a longish, slowish transition reminiscent of the decline of international long distance revenue, fixed line voice or text messaging.

source: Rethink Research

Consider a simple five-year estimate of revenue changes in the U.S. telecom market. Revenue changes less than one percent, but the volume of revenue from growing and declining contributors changes from negative five percent to positive 24 percent.

Basically, voice and messaging revenues drop, while data revenues, business segment and video entertainment revenues climb.

source: Analysys Mason

As former Cisco CEO John Chambers was always fond of saying, transitions are the key to success. “Market transitions wait for no one,” Chambers said. In 2011, perhaps it would have been thought unremarkable to assert that “voice will be free.”

In 2000, at the very peak of U.S. long distance revenue, it might have seemed more outlandish.

source: FCC

Of course, that was only part of his thinking. "It wasn’t just voice that will commoditize and be free. Data transport will commoditize and be free and then video will commoditize and be free,” Chambers has argued, referring to the transmission business, not the content business.

How Big is the SD-WAN Market?

One clear issue for markets with enterprise (customer-owned) and service provider (network service) segments is that overall combined forecasts can mislead. That has been very clear with the software-defined wide area network (SD-WAN) market, which has a distinct enterprise segment (organizations buy their own equipment to provision) and a managed service business (carrier supplies the service).

Forecasts of the balance between the private and managed service portions of the SD-WAN market vary substantially. Some believe most of the business will be private.

Between now and 2020, the service provider managed SD-WAN business will grow, but the enterprise-owned SD-WAN business might grow faster. By some estimates the managed services business will be about six percent of the total market by 2020.

Others think the SD-WAN business will be a mix, roughly in equal parts, of private implementations and managed services. Yet others believe managed services will represent most of the revenue, eventually.  

source: P&S Market Research