Wireless, Mobile are Going to Put Huge New Stress on Fixed Network Providers

It now appears almost inevitable that fixed wireless and mobile services are going to play huge roles in consumer and business internet access. Part of the story is 5G, which will bring minimum speeds of a gigabit per second to every device, with an upgrade path to 10 Gbps, especially in urban areas.

Fixed wireless is the other part of the story, as gigabit levels of service are commercialized by AT&T and Verizon, as well as Google Fiber.

Competitive market dynamics are the third major driver for untethered or mobile access. Simply, in robustly-competitive markets (and fixed network access services are about to get much more competitive), stranded assets kill the business model.

If 80 percent stranded assets already are the problem Google Fiber has faced, 50 percent stranded assets already are the problem telcos face. Cable companies fare best, facing stranded asset issues of perhaps 40 percent.

Once multiple mobile providers are able to compete head to head with any fixed operator for triple play services, the stranded asset problem is going to get much worse, for virtually all fixed network suppliers.

In some ways, Google Fiber’s experience with gigabit internet access resembles Verizon’s earlier experience with Fios. Both firms announced aggressive fiber-to-home builds, and both halted those builds before completion of the announced or intended  footprints.

As Google Fiber maintains its construction and marketing of existing gigabit networks, while pausing extension, so did Verizon halt its Fios build before all of its major metro areas were wired.

The business model seems to have been the issue for both firms. Google Fiber has been disappointed with take rates and revenue, while Verizon seems to have discovered the business model did not work as well as expected, either.

Likewise, both firms now believe fixed wireless could substantially improve the business model.

The dynamics of competitive access markets are among the key reasons both firms now think differently about fiber to the home deployment. In the monopoly era, the supplier of access services (voice, for telcos; video entertainment for cable TV companies) could safely assume that, once a network was built, adoption would range from 80 percent to 95 percent.

Broadband Internet	Subscribers	Net Adds
Cable Companies			Share
Comcast	24,316,000	329,000
Charter	22,202,000	387,000
Altice	4,122,000	17,000
Mediacom	1,145,000	17,000
WOW (WideOpenWest)*	728,400	2,700
Cable ONE	510,573	2,256
Other Major Private Company**	4,765,000	20,000
Total Top Cable	57,788,973	774,956	62.49%
Phone Companies
AT&T	15,618,000	-23,000
Verizon	7,038,000	24,000
CenturyLink	5,950,000	-40,000
Frontier^	4,404,000	-99,000
Windstream	1,063,000	-12,800
FairPoint	309,547	-1,893
Cincinnati Bell	299,800	3,100
Total Top Phone Companies	34,682,347	-149,593	37.51%
Total Broadband	92,471,320	625,563
source: Leichtman Research

That meant the “cost per customer” and “cost per location” were nearly identical. In simple terms, “build past a home or business, get that location as a customer” was a good rule of thumb.

All that changes in competitive markets. In internet access markets, one firm--typically the cable operator--can expect to get as much as 60 percent take rates, while the telco can expect to get 40 percent take rates.

Video, in fact, is the more competitive market, as there are at least three suppliers in every market, limiting cable operators to about 50 percent adoption, while satellite gets 20 percent share and most telcos get about 20 percent. The salient exception is AT&T, which owns both DirecTV satellite service and also has sold U-verse video services. In some instances (in its largest fixed network areas) AT&T could have as much as 25 percent total video account share.

The obvious implication is that network “cost per potential customer” (cost per passing) and “cost per customer” diverge quite a lot. Cost per passing represents significant stranded investment, when take rates range from less than 20 percent to 50 percent.

Simply, at 20-percent take rates, cost per customer is five times the cost per passing. Even at robust 50-percent take rates, “cost per customer” is double that of “cost per passing.”

Even Verizon, able to sell three anchor services, with 40 percent adoption of internet access and perhaps about the same voice adoption (as a percentage of homes passed), has found the business case for Fios a difficult proposition. That is why its new optical fiber deployments are based on enterprise and mobile backhaul requirements first, to create a relatively dense optical footprint, and then to extend from optical endpoints to potential consumer neighborhoods.

It is doubtful Google Fiber has managed to consistently get 20 percent adoption in most of its markets.

That is why both Verizon and Google Fiber have paused their original fiber-to-home footprints, and why both are seriously moving towards fixed wireless access to provide gigabit internet access.

Pay-TV Providers	Subscribers	Net Adds
			Share
Cable Companies
Comcast	22,428,000	32,000
Charter	17,275,000	-37,000
Altice	3,598,000	-41,000
Mediacom	834,000	-8,000
Cable ONE	329,386	-9,588
Other major private company*	4,305,000	-25,000
Total Top Cable	48,769,386	-88,588	52.08%
Satellite TV Companies (DBS)
DirecTV	20,777,000	323,000	22.19%
DISH**	13,643,000	-116,000
Total DBS	34,420,000	207,000	36.75%
Phone Companies
Verizon FiOS	4,673,000	36,000
AT&T U-verse	4,544,000	-325,000	4.85%
Frontier^	1,245,000	-85,000
Total Top Phone	10,462,000	-374,000	11.17%
Total Top Pay-TV Providers	93,651,386	-255,588
source: Leichtman Research