Can Lumen Increase Consumer FTTH by 10X?

Lumen Technologies is expanding its fiber to home expansion activity, expecting to boost the availability of fiber-to-premises beyond the 27 percent of homes it already supports.  With the caveat that Lumen’s future success rests more with its enterprise portfolio than its consumer broadband business (all mass markets revenue is about 25 percent of total), the fiber upgrades should boost subscription rates. 

Where the fiber access network gets about 27 percent adoption, the copper access network gets about 14 percent take rates. In other words, FTTH gets almost double the adoption of the copper access product, with FTTH average revenue per account of about $59 a month. 

source: Lumen 

In principle, Lumen should be able to gain a price advantage over its key cable TV competitors, at least if most customers on all the networks buy the advertised products at the advertised prices (ignoring promotional or bundle pricing). Whether that is the case in practice is far from clear. 

source: Lumen 

Nor is it always completely clear that 5G and 4G mobile networks are outclassed to the point that they cannot gain significant market share. The early evidence suggests that a significant portion of the consumer market is content with lower-speed service (up to 200 Mbps), and will buy a fixed wireless service. That value segment could represent about 33 percent of the present market. 

As always, that value segment will be offered higher speeds over time, for about the same price (less than $50 a month). 

Some of us would argue that the real advantage over cable will lie in symmetrical broadband features, not price per bit or downstream speed. 

The issue is how fast cable companies will move to boost upstream speeds; how fast Lumen can upgrade its home broadband access facilities and how fast both Lumen and the cable firms can boost downstream speeds. 

Of these three, the first two are likely going to be crucial, as the salient performance advantage Lumen will be able to claim, once facilities are upgraded to fiber, is upstream speed. Lumen believes it will be able to build the network for $1,000 per passing or less, with incremental capital required to activate each customer location. 

The issue then will become the penetration rate (customer adoption rate): can Lumen relatively quickly boost its customer share from 27 percent up closer to 40 percent? Possibly equally important, can Lumen get a higher share of the performance-oriented segment of the market, willing to pay more? 

Much could hinge on whether Lumen can hit its own goal of upgrading to a total of about 12 million FTTH  locations over the next six years, at the expected capital investment cost, at the expected take rate.

Shift from Multicast to Unicast Underlies Access Network Economics

The debate over how to fund access networks, as framed by some policymakers and connectivity providers, relies on how access customers use those networks. The argument is that a disproportionate share of traffic, and therefore demand for capacity investments, is driven by a handful of big content and app providers. 

It is a novel argument, in the area of communications regulation. Business partners (other networks) have been revenue contributors when other networks terminate their voice traffic, for example. 

But some point to South Korea as an example of cost-sharing mechanisms applied to hyperscale app providers.

South Korean internet service providers levy fees on content providers representing more than one percent of access network traffic or have one million or more users. Fees amount to roughly $20/terabyte ($0.02/GB).

The principle is analogous to the bilateral agreements access providers have with all others: when a traffic source uses a traffic sink (sender and receiver), network resources are used, so compensation is due. 

Such agreements, in the past, have been limited to access provider networks. What is novel in South Korea is the notion that some application sources are equivalent to other historic traffic sources: they generate remote traffic terminated on a local network. 

So far, such claims are not officially bilateral, which is how prior arrangements have worked. The South Korean model is sender pays, similar to a “calling party pays” model. 

Those of you with long memories will recall how the vested interests play out in any such bilateral agreements when there is an imbalance of traffic. Any payment mechanisms based on sender pays (calling party pays) benefit small net sinks and penalize large net sources. 

In other words, if a network terminates lots of traffic, it gains revenue. Large traffic generators (sources) incur substantial operating costs. 

Of course, as with all such matters, it is complicated. There are domestic content implications and industrial policy interests. In some quarters, such rules might be part of other strategies to protect and promote domestic suppliers against foreign suppliers. 

At the level of network engineering, the imbalances and costs are a direct result of choices about network architectures, namely the shift of content delivery from broadcast or multicast to unicast or “on demand” delivery. 

This is a matter of physics. Some networks are optimized for multicast (broadcast). Others are optimized for on-demand and unicast. Satellite networks, TV and radio broadcast networks are optimized for multicast: one copy to millions of recipients. 

Unicast networks (the internet, voice networks) are optimized to support one-to-one sessions. 

So what happens when we shift broadcast traffic (multicast) to unicast and on-demand delivery is that we change the economics. In place of bandwidth-efficient delivery (multicast or broadcast), we substitute bandwidth “inefficient” delivery.

In place of “one message, millions of receivers” we shift to “millions of messages, millions of recipients.” Instead of launching one copy of a TV show--send to millions of recipients-- we launch millions of copies  to individual recipients. 

Bandwidth demand grows to match. If a multicast event requires X bandwidth, then one million copies of that same event requires 1,000,000X. Yes, six orders of magnitude more bandwidth is needed. 

There are lots of other implications. 

Universal service funding in the United States is based on a tax on voice usage and voice lines. You might argue that made lots of sense in prior eras where voice was the service to be subsidized. 

It makes less sense in the internet era, when broadband internet access is the service governments wish to subsidize. Also, it seems illogical to tax a declining service (voice) to support the “now-essential” service (internet access). 

The point is that what some call “cost recovery” and others might call a “tax” is part of a horribly complicated shift in how networks are designed and used.

Home Broadband Costs Keep Falling

In the twelve months to the close of the second quarter of  2022, global fixed-line home broadband subscribers saw their average monthly charges decrease by four percent on copper, cable and fiber-to-home based tariffs, says Point Topic.

source: Point Topic 

Across the three technologies the average bandwidth increased by 22 percent year-on-year. 

source: Point Topic 

Still, the typical cost of each megabit-per-second unit of capacity was markedly lower on hybrid fiber coax and fiber to home networks, compared to slower copper-access networks. In substantial part, that is because of the vast difference in capacity between copper and other networks. 

As speed climbs, cost-per-bit falls. 

Many Power Users Among Low-Income "Home Broadband" Households

Life often is more complicated and surprising than any theory can predict. Consider home broadband consumer behavior. Consider a recent analysis by Openvault, of “low-income” home broadband households using subsidy programs.

“Broadband usage patterns of participants in the FCC’s Affordable Connectivity Program are significantly exceeding those of the broader connected population,” according to Openvault. 

Launched in January 2022, the ACP provides low-income households with a $30 per month ($75 for tribal households) subsidy that can be applied towards a monthly internet subscription. 

One might guess that low-income households would sign up for a value package, perhaps often a 100-Mbps connection that might, with the $30 subsidy, be almost--or actually--free. That might also suggest that total household consumption would be lower than usual, simply because speed tends to correlate with total data consumption. 

source: Openvault-+

But Openvault suggests that often is not the case. ACP participants’ median usage of 499.3 gigabytes per month is almost 60 percent higher than the median of 313.9 GB per month for all subscribers, Openvault says.

ACP participants are 36 percent more likely to be power users of 1 TB or more, and 52 percent more likely to be super power users of 2 TB or more, Openvault notes. Also, ACP participants’ average usage of 654 GB per month is 33.3 percent higher than the average of 490.7 GB for all subscribers.

There is a fairly simple reason for such data. The ACP can be used by college students. Younger users and college students tend to be heavier consumers of internet data. Eligible participants include people who:

• Received a Federal Pell Grant during the current award year;

• Meets the eligibility criteria for a participating provider's existing low-income internet program;

• Participates in one of these assistance programs:

• Free and Reduced-Price School Lunch Program or School Breakfast Program, including at U.S. Department of Agriculture (USDA) Community Eligibility Provision schools.

• SNAP

• Medicaid

• Housing Choice Voucher (HCV) Program (Section 8 Vouchers)

• Project-Based Rental Assistance (PBRA)/202/811

• Public Housing 

• Supplemental Security Income (SSI)

• WIC

• Veterans Pension or Survivor Benefits

• or Lifeline;

• Participates in one of these assistance programs and lives on Qualifying Tribal lands:

• Bureau of Indian Affairs General Assistance 

• Tribal TANF

• Food Distribution Program on Indian Reservations

• Tribal Head Start (income based)

• Affordable Housing Programs for American Indians, Alaska Natives or Native Hawaiians

That list includes some people and households most people would consider “low income.” But it also includes college students who are only temporarily “low income.” They also are more likely to be “power users.” 

The data do not preclude, however, the notion that many low-income households might be using the subsidies to buy higher-speed service, whether those customers are students, the eldersly or others with low income.

Is Web3 the Second Coming of Peer-to-Peer?

Decentralization is the main organizing principle of Web3, often said to support user ownership of content as well as disintermediation of many other operations: banking and finance, for example. 

Those of you who can remember the early days of the internet--before the emergence of the World Wide Web or visual browsers and multimedia, plus the shift to read-write from read-only--might remember the early ethos of the pre-Web internet, which was collaborative. 

The internet was about sharing, not commerce. The push for Web3 has a similar ethos: put control and ownership of assets back in the hands of “users.” Think of the role of peer-to-peer for a Web2 analogy of how things could work. 

source: McKinsey 

Has P2P revolutionized media and content; payments; finance or other functions conducted on the web? Perhaps, to a limited degree, in some areas. But P2P has not revolutionized much of anything related to the web. 

We also may decry the rise of “platforms” owned by corporations or bigger firms. But in what part of the real economy does this not happen? We often applaud and support efforts to reduce inequality in any society; even to the extent of opposing rigid class structures. But where has that ever worked, one might ask. 

That is hot to say something will come of Web3 that is useful. Blockchain seems destined for wider use, for example. Crypto currencies likewise should gain traction, eventually. 

But we might be skeptical of the broader claims about Web3 democratizing all--or most--of the internet, preventing the rise of large new platforms. That is not to say a further balkanization of the internet is unlikely. Indeed, that balkanization has been going on for a couple to a few decades. 

In a sense, Web3 appears to be the second coming of P2P. P2P did not revolutionized the web. Web3 might not do so, either.

Vodafone Gets New "Activist" Investor Atlas Investissement and Might See Push for Divesting or Monetizing Some Digital Infrastructure

Atlas Investissement, a private equity firm, has taken a 2.5-percent stake in Vodafone, presumably to push Vodafone into further actions to streamline and consolidate its businesses. 

Among the possible moves is pressure to encourage Vodafone to structurally separate parts of its infrastructure beyond cell towers, which the company already has said it is contemplating. 

“Atlas Investissement is supportive of Vodafone’s publicly-stated intention to pursue consolidation opportunities in selected geographies, as well as its efforts in infrastructure separation,” the firm said in announcing the investment. 

In recent days we have seen former Brazilian incumbent telco Oi essentially adopt a mobile virtual network operator model where it runs on leased facilities owned by a separate entity. 

Oi, which had entered bankruptcy in 2016, is moving ahead with a slimmed-down and “asset light” operating model wher it leases wholesale capacity and services from a facilities-based entity rather than owning the assets outright. 

To make that shift, and shed debt, Oi has shed its mobile assets, cell towers, data centers, video entertainment operations. It also is structurally separating its fixed network infrastructure operations from its retail fixed network operations, but will retain a minority stake in the infrastructure assets supplier. 

Structural separation of Telecom Italia’s fixed network also has been the subject of extensive consideration. Mergers also have been discussed for parts of the existing business, including fiber access infra. 

In other cases, joint ventures or co-invesment has been the path chosen to reduce capital investment in digital infrastructure, especially access networks.  

The future question is digital infrastructure assets might eventually be monetized. Data centers, of course, already have been purchased by private equity and other institutional investors. But perhaps there could be some further interest in related assets such as:

• Structured cabling 

• Distributed antenna systems (DAS)

• Electrical, aerial and underground fiber deployment 

• Civil construction 

• Small cell or micro cell installations 

• Indoor DAS and outdoor DAS integration

None of those assets historically have been of interest to buyers who have purchased real estate assets. Lack of scale is an issue for most of these sorts of assets, for example.

Customer Satisfaction Falls Off a Cliff

Whatever else one wishes to glean from this data, something has changed, and in a big way. The American Customer Satisfaction Index is a long-term research project measuring customer satisfaction with a wide variety of goods and services. Some say the Covid pandemic plays a role, as any service industry would have been negatively affected. 

 

source: ACSI 

Still, the decline began before the pandemic, declining in 2018 and 2019 before the pandemic hit. 

The point is that after nearly two decades of climbing, customer satisfaction has plummeted. That will provide little to no comfort for marketers required to assess their own firm’s customer satisfaction scores. Most firms, in most industries, are likely to track the precipitous fall in customer satisfaction scores.