At Least in Developed Country Markets, Tier One Carriers Must Move up the Stack

Mobile and fixed service providers in developed countries have some problems that service providers do not. Revenue growth and total revenue are among the top problems. In developed countries, voice revenue peaked between 2000 and 2002.

Overall revenue peaked about 2008 and has generally dropped since then. It is hard to overemphasize that point. Since the invention of telephony, revenue generally has grown, every year. So the break in 2008 is highly significant (firm results, and country results, will vary, but 2000 and 2008 remain key OECD turning points).

So while not every segment has the same opportunities, the search for new revenues outside the access core now is imperative. At least in developed markets, revenue growth is going to be challenged to non-existent in the legacy access services segments.

It might well be true that some specialist segments, and small telcos and ISPs generally,  have fewer options for moving “up the stack.” But surviving tier one telecom service providers will have done so.

After 175 years, the fundamental growth drivers for developed market telecom have largely become exhausted.

source: OECD

Since about 2008, global value added (US$ activity) in the telecom segment has declined 10 percent, while value for information technology services and software has grown.

source: OECD

source: OECD

Will U.S. Fixed Network Internet Access Prices Climb?

Some observers believe consumer internet access prices are going to climb. Some argue that value is relatively high, while prices are relatively low. Many will contest that notion, but at least in most Organization for Economic Cooperation and Development countries, prices for fixed access seem reasonable, averaging about US$40 per month for plans with about 200 Gbytes of usage, in 2016.

The real opportunity for disruptive changes, though, arguably lies with mobile internet access, as advanced 4G and 5G services operating up to gigabit speeds become more common. To be sure, mobile usage buckets would have to grow by nearly an order of magnitude to offer value-price parity with fixed network plans.

That is perhaps not likely to happen immediately, but 5G fixed wireless likely will be priced at comparable levels with other fixed offers.

source: OECD

Small Cell 5G Latest Phase of Mobile Substitution

Mobile substitution has proceeded in waves, with 2G mobile voice displacing first long distance calling, then email, then fixed line voice entirely, for many consumers.

In the 3G era, Wi-Fi offload has been an important end user experience tool, providing end user experience that often was better than when users stayed on the mobile network. But mobile internet access generally was not a substitute for fixed access.

In the 4G era, mobile speeds often are better than Wi-Fi speeds, and in some cases, mobile internet access could be used as a substitute for fixed internet access. Tariffs were the biggest barrier to full substitution, as mobile cost-per-gigabyte remained so much higher than fixed network cost-per-gigabyte.

source: www.schouwenburg.com/blog

source: Wikipedia

In the 5G era, mobile end user experience might be equal to, or better than, fixed network performance. In part, that eventually will happen as huge quantities of new spectrum are made available, as small cells become routine parts of the mobile infrastructure and as spectrum aggregation techniques, blending licensed and unlicensed spectrum, are deployed.

Small cells are useful for any number of reasons, including intensive frequency reuse and ability to use unlicensed spectrum in the 5-GHz band, featuring 400 MHz of spectrum.

The ability to aggregate licensed mobile and unlicensed Wi-Fi spectrum in a small cell can dramatically improve end user experience, in terms of internet access speed. In recent tests conducted by Signals Research Group, gigabit LTE device performance more than doubled over a licensed-only deployment, using devices able to use 600-MHz LTE-Advanced, with spectral efficiency boosted 30 percent to 40 percent.

source: Ericsson

Proximity Payments a Telco Failure; OTT Video a Success

The volume of proximity payments--using a mobile phone to buy something at a store--is growing. But the market remains highly fragmented. Those transactions are facilitated by use of smartphones, but “telecom” involvement is nil to non-existent (in the United States).

Major device manufacturers, on the other hand, have introduced their own payment systems (Apple Pay, Samsung Wallet).

source: Business Insider

Perhaps this is one more example of how the internet ecosystem now works. “Access to the internet” (the revenue model for mobile and fixed network service providers) actually does not confer as much natural advantage as you might suspect, where it comes to creating a robust applications or service business.

The phrase “dumb pipe” is an accurate description of the broad limitations on telco roles: they supply the access. Almost all other value is supplied by devices and app suppliers.

So “mobile proximity payments” illustrates the value of “moving up the stack,” and the danger of remaining a dumb pipe, instead of becoming a supplier of key apps.

That is why mobile content makes sense to AT&T. It is a tangible way of moving up the stack for an anchor consumer service, with value beyond direct revenue.

Compared to the linear video business case, mobile video is weighted more towards incremental advertising revenues, mobile customer retention (churn reduction) and streaming revenues (on AT&T’s own network and over the top on other mobile networks).

As AT&T has argued, for at least 20 million U.S. households, price is a barrier to buying linear TV subscriptions. Those households tend to be younger, with lower income, without children. But most of those households also are mobile-only and mobile-centric.

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Proximity payments might represent a case of failed telco ability to create a role in a new ecosystem. OTT and mobile video are proving, so far, to be an example of success.

More Competition Coming in Fixed Network ISP Business

Despite claims that consumer internet access competition is about to be snuffed out, competition actually is poised to grow in a big way: far more extensively than independent internet service providers might hope to provide in the way of competition.

In large part, that is because Verizon seems poised to become a major out-of-region fixed network ISP, competing directly with Comcast, AT&T, CenturyLink and Charter Communications.  

As consumer fixed network communications is a scale business, new market entry by scale providers matters quite a lot. No matter how successful small ISP providers might be, they do not have the scale to tip market share figures on a national scale.

Will Verizon build on its XO Communications metro assets to build small cell and fixed wireless networks in major metro areas outside its core Northeast U.S. footprint? It appears certain.

When 5G-based fixed wireless is launched in the U.S. market by Verizon starting in 2018, it is likely to be heavily deployed out of region by Verizon, for the simple reason that Verizon’s fixed network is limited to the Northeast United States, while the millimeter wave spectrum assets cover population centers across the United States.

Also, compared to building in-region, in some cases, the path to gaining revenue and market share is stronger out of region. As cable TV operators were able to grow market share in voice by taking market share from the incumbents, so Verizon will be able to grow revenue by taking market share from incumbents out of region.

After selling assets in California, Texas and Florida to Frontier Communications, Verizon is a firm with fixed network assets in the Northeast and Mid-Atlantic U.S. only. If one assumes a small cell network eventually will be build out in population centers nationwide, that means Verizon has to create new backhaul networks in  most of the larger markets of the United States.

When that happens, the backhaul infrastructure is likely to build on the metro assets obtained when Verizon purchased XO Communications.

The first announced market--Sacramento, Calif.--is an AT&T fixed network region, for example, and is a market served by the former XO Communications.  

If you look at the areas where Verizon has millimeter wave spectrum ready to use (purple shaded areas on map below), you can see that Verizon has many opportunities both inside and outside its fixed network footprint.

By definition (there are only two other significant former Bell system fixed network operators remaining), it would compete against either AT&T or CenturyLink out of region.

source: XO Communications (Verizon)

Will IoT Drive Mobile Operator Roaming Revenues?

A substantial percentage of mobile operator internet of things revenue might come from roaming, according to consultancy ROCCO.  In 2016 most surveyed mobile operators made zero to five percent of total revenues from roaming IoT.

By 2020, executives believe such amounts could represent up to half of all roaming revenues, they believe.

If roaming revenues are $31 billion by 2022, that implies inbound IoT revenues of perhaps $15 billion globally.

Some 33 mobile service provider execs, out of 73, believe  that inbound IoT roaming revenues will match that of traditional roaming by 2020. About 66 percent of those respondents believe  inbound roaming will generate 40 percent to 50 percent of roaming revenues by 2020.

source: ROCCO

All executives from mid-size to enterprise firms in agriculture, surveyed by Vanson Bourne on behalf of Inmarsat, believe they will be using  internet of things apps and services within about five years.

Some 85 percent of executives in transportation industries believe they will be using IoT apps and services within five years, and nearly that many in the energy business. In the mining business, perhaps 65 percent of respondents believe they will be using IoT in five years.

You are not likely surprised by such findings. Given the hype around internet of things, it would be a rare executive who thought it “sounded right” to project no use of such capabilities.

Neither are you likely surprised that Inmarsat might sponsor such research. No less than other segments of the communications industry, satellite firms argue they will be relevant for IoT, largely because of coverage capabilities. Basically, that is the newest form of the “no one platform is best for all scenarios” argument.

It remains to be seen which satellite implementations are workable for which IoT apps, and how big satellite IoT connectivity revenue might be.

“Despite growing demand for IoT satellite services, the business case for IoT exclusive satellite constellations has yet to be proven, especially considering the exponential growth of LPWANs, LTE-M and NB-IoT terrestrial networks for IoT,” says Alan Weissberger of the IEEE ComSoc blog.

Obviously, geostationary platforms are going to have huge problems supporting ultra-low latency apps. Low earth orbit (LEO) constellations arguably will fit a wider range of missions. Low-bandwidth, non-time-sensitive apps might fit best, for any satellite platforms.

Satellite market researcher NSR predicts transportation apps will be the biggest application.

source: NSR

Broadcast (multicast) has been the geostationary satellite network’s fundamental architecture, so multicast apps will make sense, though that is perhaps not an IoT app at all. In other cases, some argue satellite has a role for connected car communications, possibly for multicast use cases.

Some will note that satellite presently serves a niche role in end user communications, serving ships at sea and remote areas where other networks do not reach. That is likely to be the case for most geostationary satellite future apps as well. It is not yet clear how big a role LEO constellations will have.

Expect to hear a lot of promotion from the satellite industry about that industry’s role in internet of things. It will be small, it is safe to say. Satellite researcher NSR projects satellite industry revenue from IoT at less than $3 billion globally by 2026. And that might be highly optimistic.

source: NSR

Some estimate the global IoT connectivity market will be an insignificant fraction of total IoT revenues by about 2025, NSR projects global satellite revenues from IoT might reach about $3.5 billion by 2026.

In that same year, total global satellite connectivity revenues might represent less than $20 billion in revenue. So NSR estimates IoT will represent as much as 17 percent of total satellite industry revenues.

By about 2025, some estimate mobile operator IoT connection revenue of $22 billion. Total global communications service provider revenues should be about US$1 trillion by then.

Also, projections for service provider enterprise connections must contend with the possible use of Wi-Fi or other access mechanisms which do not incrementally increase connection revenue in a direct sense, if at all.

The bottom line is that satellite IoT is at present as uncertain as mobile or fixed network IoT connection revenue might be.

FTC Has Seen Potential Consumer Gains from Paid Prioitization

The reason economists and policymakers want competition in markets is that competition disciplines suppliers, producing greater benefits for consumers. With regard to prioritized handling of consumer internet packets, the Federal Trade Commission, which now has oversight over consumer protection of  internet access services, says more competition is coming.

That being the case, regulators should wait to see how practices develop, before trying to determine--in advance--whether new internet service provider policies are helpful or harmful.

“Many proponents of net neutrality regulation are concerned that broadband Internet access suppliers have market power in the last-mile access market and that they will leverage that power into adjacent content and applications markets in a way that will harm competition in those markets and, ultimately, consumers,” the FTC said.

Exclusive dealing arrangements, refusals to deal, vertical integration, or other unilateral conduct

“can be anticompetitive and harmful to consumers under certain conditions,” the FTC said.

But, the FTC also noted, such practices “can be procompetitive, capable of improving efficiency and consumer welfare, which involves, among other things, the prices that consumers pay, the quality of goods and services offered, and the choices that are available in the marketplace.”

“In evaluating whether new proscriptions are necessary, we advise proceeding with caution before enacting broad, ex ante restrictions in an unsettled, dynamic environment,” the FTC said.

“There is evidence that the broadband Internet access industry is moving in the direction of more, not less, competition, including fast growth, declining prices for higher-quality service, and the current market-leading technology (i.e., cable modem) losing share to the more recently deregulated major alternative (i.e., DSL),” the FTC said. “There also appears to be substantial agreement on the part of both proponents and opponents of net neutrality regulation that greater competition in the area of broadband Internet access would benefit consumers.”

“We recommend that policy makers proceed with caution in evaluating proposals to enact regulation in the area of broadband Internet access,” the FTC report said. “It is not possible to know in the abstract whether allowing content and applications providers to pay broadband providers for prioritized data transmission will be beneficial or harmful to consumers.”

India Telcos Could Take 50% Market Share in Subscription Video

India’s telcos could take as much as 50 percent market share (installed base) in the video subscription business, equity analysts at HSBC Global Research estimate.

“This implies urban digital cable TV average revenue per user (ARPUs) may expand two to three times in the medium term,” HSBC argues.

Two points worth noting: it often is a safe assumption that attackers can grow revenue by taking market share from incumbents, when markets are well understood and incumbents have had little direct competition.

Also, the move into video content distribution moves Indian telcos back into one key

“application” area, as their voice app and messaging app businesses slow and decline.
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We often forget that telcos once wished to sell an app--voice communications--and had to build networks to deliver that service. Likewise, broadcast TV and radio stations wanted to deliver TV and audio, and similarly built their own networks to do so. Cable TV providers did the same.

The main point is that revenue and business models are driven by apps customers want to use. As legacy app revenues recede, networks of all types must find new apps to generate new revenues to replace what they lose.

Such moves might be called “going up the stack” into the app space, and beyond the “internet access” or “application access” function. The moves might also accurately be termed a return to the historic revenue models: using networks to deliver applications and services customers want to buy.

That is why “diversification” moves beyond “traditional” telecom services are so important. While there is danger as entities move into new lines of business, there really is no alternative.

To prosper, maintain revenues and profit margins, network operators must discover or create new “apps” that create sustainable revenue models.

T-Mobile US to Get into Video Streaming

If you had any remaining doubts about the role of video entertainment, and video entertainment as a revenue and value driver for access providers--mobile and fixed--consider that T-Mobile US is making its own move into the managed over the top video service arena.

T-Mobile US says it will launch a new video entertainment service in 2018, building on a managed video service already created by Layer3 TV, a managed service provider that already offers a managed video service, using internet connections, not a physical access network.

source: PwC, Ovum

The larger issue is that the “access provider” business (telco, cable, ISP) has a monetization problem: revenue-generating applications that historically have driven most of the income now can be provided by unaffiliated third parties.

That can be seen in over the top impact on service provider services (voice, messaging and not linear video).

So, beyond the dumb pipe “internet access” service, all other revenue streams must be built on some application that runs over the access network. That can include internet OTT or managed services.

Video entertainment is a prime example of a managed service.

source: McKinsey

Winner Take All in Virtually All Parts of Internet Ecosystem

One salient feature of the internet ecosystem is that it tends toward “winner take all” market structures, whether one looks at the application, operating system, device or access parts of the ecosystem.

In the application space, advertising revenue is dominated by Google and Facebook, which claim 63 percent of U.S. digital ad revenue in 2017. In the operating system market, Android and Apple iOS are the leaders, with 99-percent market share. The device portion of the market is the least concentrated , although Apple and Samsung have earned most of the profits.  

Mobile and fixed network access markets likewise are oligopolies, in virtually every market. Fixed markets in many cases remain virtual monopolies, while mobile markets tend to be oligopolies.

source: eMarketer

Network Slicing Raises More Issues About Internet Freedom

Network slicing--the ability to create customized virtual private networks--is a key underpinning of the core networks that will support 5G, and potentially creates new revenue opportunities for service provides able to provide such customized network features.

Perhaps inevitably, network slicing will create yet another opportunity to raise “network neutrality” concerns where many would argue they do not properly exist. 

The whole point of network slicing is to allow creation of services with different class or quality of service (Cos/QoS) attributes. And, of course, that is the core of the consumer “best effort only” restriction, where CoS and QoS are prohibited, even if such features are allowable for business services and managed services (linear video, voice and messaging being the prime examples of managed services supplied by a service provider).

For entirely practical reasons, it seems likely that most network slicing deployments will support enterprise networks. That is because enterprises are the most likely to have an immediate business case, as enterprises have been the buyers of content delivery services, which likewise supply QoS advantages for enterprises in the application and content businesses. 

For service providers and enterprises, network slicing should help optimize traffic and provide load management advantages. Because network slices are supposed to be highly dynamic, that feature also should simply chores related to creating and modifying wholesale capacity operations, such as supplying bandwidth to mobile virtual network operators. 

For enterprises and service providers, the goal of fast and easy changes to network resources also should be supported, allowing “on the fly” adjustments to latency or capacity. 

In the area of machine or connected car communications, network slicing should help create guaranteed low latency communications for those use cases where very-low and assured latency is fundamental. 

Network slicing also should help in instances where quality of experience (latency and bandwidth) is important for end users.  

With regard to perceived “network neutrality” concerns, network slicing will provide additional evidence of how truly hard it is to separate “unhindered access to lawful internet apps” from legitimate network management practices. Network neutrality rules always have been murky on that division of prohibited and permissible traffic shaping practices.

The phrase “treat every bit equally” is unhelpful, in the context of network neutrality discussions, as most major suppliers of consumer internet apps already employ measures to treat their own bits differentially. That is the whole point of CDNs: unequal treatment. 

The whole point of a CDN is to provide better quality of experience by minimizing latency, for the firms that choose to use CDNs. 

Beyond that, the whole effort to case every business practice as covered by network neutrality (consumer access to all lawful apps; best-effort-only access) is further stressed by network slicing, to the extent that content or app providers decide to take advantage of such network features to improve quality of experience for their internet-accessed apps. 

So is the effort to portray the only-important business practices covered by the “lawful access” and “no blocking” principles solely to access providers, and not to app providers. Amazon will not allow Google to sell its voice-activated home appliances on Amazon; Google blocks Amazon appliances from using YouTube.

That is more than “prioritizing packets,” that is actual blocking of lawful commerce and content. And yet, so far, there is little serious consideration of those business practices from the standpoint of maintaining end user or customer access to all lawful apps, content or products.

That, perhaps, is the main point. Business practices are not necessarily “violations” of internet freedom, though some believe zero rating, a business practice, also should be covered by such rules. Some would argue that the effort to cast only some business practices as violating internet freedom is wrong. Freedom is the better approach. 

Consumers should have the freedom to use lawful apps. App, content and commerce providers should have freedom to choose their own business practices. Access providers should be free to create additional mechanisms, features and services for access that enhance quality of experience. 

That makes even more sense as the roles blur and fuse. Increasingly, content ownership, content development, delivery and use are functions integrated across the value chain. Freedom for all is the better approach than “freedom only for some.”