Mobile IoT Connectivity Success Requires Taking Share of Connections from Fixed Nets

In a very real sense, mobile service provider success in the internet of things connections business requires mobile substitution for fixed network connections.

Internet of Things is both a strategic opportunity for mobile service providers and internet service providers and a huge challenge. The upside is that connectivity services for sensors and other machines represents the big “incremental account additions.”

The challenge is that revenue per device is going to be quite low, compared to connections supporting smartphones. Existing  IoT connections sell for as little as $6 a year in the U.S. market.

Of a total of US$227 to US$581 billion in total IoT revenue in 2020, perhaps $10 billion to $29 billion will be earned by supplying connectivity services. That represents something between four percent and five percent of industry revenues.

Even with some scale, that might not be a terribly profitable or cash flow generating source.

Granted, many forecasts call for many billions of IoT connections. Still, most of those connections might rely on an existing local network of some type, producing nil incremental direct revenue.

In 2017, almost three-quarters of all low power wide area network connections used non-cellular LWPA network technologies, according to ABI Research.

The Ericsson Mobility Report estimates that in 2023, mobile IoT connections will represent 15 percent of IoT connections, with short-range networks handling as much as 67 percent of links.

source: Ericsson

Obviously, for service providers that have the scale, participation in other parts of the IoT ecosystem will provide a possibly-bigger revenue value contribution, and therefore revenue opportunity.

“When you’re looking at all the different ways in which connectivity happens today, less than 10 percent of all IoT is actually going over cellular,” said Chris Penrose, president of AT&T’s IoT business.

If you can now begin to bring a lot more devices onto the wireless (mobile) networks because you now have technologies that are secure, low-cost and really tap into a market that might’ve gone on to Wi-Fi or alternative technologies, you expand the size of the market which you can go to.”

In the connectivity part of the IoT ecosystem, mobile revenue will hinge on getting a higher percentage share of connections. For at least some service providers, bigger returns could come from participation in other parts of the ecosystem (platforms, apps, services, possibly devices).

5G Will Bring Holy Grail of "Bandwidth and Features On Demand"

For most of my professional career, the Holy Grail of networking has been “bandwidth on demand,” a network so automated and so flexible that bandwidth could be supplied by a few keystrokes, to any location, and then torn down just as fast, as needed.

These days, virtualized networks that underpin 5G are poised to provide most of those benefits, and a few others we have not traditionally considered.

Though it remains to be seen how valuable such tunable features might be for enterprise buyers (including wholesale customers who want virtual private networks), it should be possible to vary characteristics such as latency, throughput, reliability, mobility support, localized or generalized geographies, security features, analytics and cost.

That might be a very big deal for end user customers, and should also aid suppliers by reducing operating cost and capital investment.

source: Nokia Networks

That is one important element of the value of 5G networks. Traditionally, mobile platforms have brought faster speeds and lower latency, with the latest networks also reducing cost per delivered bit. In the 5G era, core networks and edge networks will have a “flow through” virtual aspect that is quite new.

Strategically, all core networks are evolving towards virtualization, which means all core networks will define, create and support virtual private networks as a basic assumption. Just as important, 5G means that such VPNs will flow through to the edge networks.

That is our “bandwidth and other features on demand” network. It is a big potential deal.

There are some related advantages for service providers, ranging from the possibility of offering differentiated classes of service as a core feature of such networks, to allowing more-efficient use of networks, to reducing operating cost and capital investment.

Customers might gain from ability to buy customized network features that match user core business models (whether there are requirements for latency, quality of service or bandwidth.

In a larger sense, we move closer to the ideal next-generation network we have been talking about--and moving towards--for several decades: a network that can supply not only bandwidth but features on demand, dynamically.

source: Nokia Networks

5G Non-Standalone is Not "Fake 5G"

One hears a lot these days about 5G standalone solution (5G NR) and 5G “non-standalone.” The difference is deployment strategy. 5G non-standalone can be deployed faster as it uses the 4G signaling (command and control) network, with new 5G radios (air interface).

Some will chide carriers for launching “fake 5GF.” It is not fake; it is a hybrid strategy that reuses existing 4G core networks to support 5G air interfaces.

Under other circumstances, objective observers would simply say that makes good business sense, allowing faster rollouts of the new platform by reusing installed infrastructure, at lower cost.

source: Nokia Networks

Will Time Warner Follow DirecTV Pattern?

AT&T's acquisition of Time Warner is going to remain controversial for some time, as was AT&T's purchase of DirecTV. But that latter move (even if still controversial in some quarters) arguably achieved its goals.

With the passage of enough time, we now can assess the “fear” or “hope” around the AT&T acquisition of DirecTV.

The fear in some quarters was that AT&T was about to substitute DirecTV as its video subscription driver, deemphasizing U-verse. About a year after the acquisition closed, the results were clear enough: DirecTV was growing and U-verse was shrinking.

source: Beyond Devices

The acquisition, in turn, allowed AT&T to increase revenues (and reduce churn) from bundling, across its fixed, mobile and satellite platforms. Perhaps the biggest change was that the new entertainment video service helped boost revenue in the mobile segment of the business.

Mobile customers buying video grew significantly, as did entertainment video customers who chose AT&T for mobility services.

source: Sure Dividend

Some still worry that entertainment video is a trap, as linear subscriptions fall out of favor and streaming products replace them. DirecTV Now's success is part of the rationale for believing that the linear platform, throwing off cash flow now, also is a strategic underpinning for the next waves of growth from content and advertising.

The Time Warner acquisition throws that earlier DirecTV acquisition into sharper relief.

Some of the changes in DirecTV versus U-verse video might be attributable to the decline of the linear video business overall. Some of the change is because of different AT&T marketing priorities. But much of the difference is from scale. AT&T’s U-verse network only reached a fraction of AT&T’s total fixed network base.

DirecTV meant that AT&T can sell nationwide, in region or outside it.

Even before the launch of DirecTV Now, the streaming product, which now has begun to outpace DirecTV subscriber growth, AT&T arguably was correct about DirecTV in key respects.

The fixed network upgrade to support U-verse was not going to happen fast enough to achieve critical mass. To get bigger, fast, AT&T was going to have to acquire that scale. And AT&T also needed an asset that would spin off free cash flow at significant levels, right away.

Growth by acquisition, in any case, has been the main driver of AT&T revenue growth for decades, so growth by acquisition obviously was a fit for AT&T company culture.

By acquiring DirecTV, AT&T instantly became the biggest linear video subscription provider in the U.S. market, something it was not going to be able to do by incrementally scaling up U-verse.

To be sure, there remain critics of AT&T’s effort to transform its business away from connectivity and towards apps and services beyond connectivity. The biggest clue is that AT&T now describes itself as a “modern media company.”

Financial analysts, in particular, are going to prefer a “stick to your knitting” approach that emphasizes connectivity products. Those of us who see that as a dead end will disagree. As difficult as it might be for AT&T and other tier-one service providers to transform themselves, reducing reliance on connectivity revenues, there is no other choice if survival as independent companies is the goal.

Not insignificantly, DirecTV boosted and supports AT&T cash flow, a strategic necessity for a firm that pays out high dividends, at scale, and whose value proposition for investors has been “steady dividend increases.”

In fact, it is not incorrect to say that AT&T’s core businesses are relatively flat, in terms of revenue growth, and that most revenue growth has come from acquisitions.

source: Yahoo

Historically, over the last three decades, both AT&T and Verizon have grown revenue mostly by acquisitions. That arguably also is true for most tier-one service providers globally, and also for most small specialized carriers in the U.S. market. Organic revenue growth typically is not large enough, or fast enough, to support either continued high growth rates or the attainment of scale, which boosts profit margins.

The Time Warner acquisition boosted revenue about $31 billion, instantly. AT&T could not have gotten that big a boost organically, no matter what it had done. To be sure, debt loads now are an issue for both AT&T and Verizon, but that is likely to be an on-going issue, if one makes the assumption future growth will continue to be lead by acquisitions, and if at least some of those acquisitions must be large, to have any immediate impact on top and bottom lines.

source: Market Realist

 

5G for Smart Cities, by Samsung

One illustration of what 5G might enable, according to Samsung. 

Bad News: Order of Magnitude Increase in Mobile Data Consumption Does Not Lead to Higher Revenue

Internet access providers long have known that there is no linear relationship between data consumption and revenue earned for providing that access. On the other hand, there is a somewhat linear relationship between cost per bit and data consumption.

New data from the U.K. Department for Digital, Culture, Media & Sport shows that although mobile customer spending on mobile internet access is roughly flat between 2012 and 2016, data consumption and cost per bit show a relatively inverse and linear relationship.

As mobile data consumption increased by an order of magnitude over those years, the cost per bit dropped by an order of magnitude.

The business model implication is clear: increasing end user data consumption does not lead to revenue increase.

source: Department for Digital, Culture, Media & Sport

5G Use Cases Start to Get More Practical

If you have been following discussions of what 5G will enable, you know that the conventional wisdom has been a trio of enhanced mobile broadband, massive machine-type communications and ultra-reliable low-latency communications. It has the feel of guesswork. Recently, more pragmatic answers are showing up.

Fixed wireless, using 5G as a substitute for cabled network consumer internet access, now is becoming a more common example of a 5G use case, and likely indicates we are moving beyond speculative to more-concrete use cases.

source: Ericsson

What Comes After Voice, Messaging, Video?

Most observers of mobile markets would likely agree that future growth is going to come from sources other than voice, messaging or even mobile data, once use of mobile services and mobile data gets to be ubiquitous.

And the hunt for those new revenue sources leans on entertainment video in the near term and internet of things over the longer term. The reasons are clear enough.

With the caveat that the data shows use of carrier voice and messaging (not total voice or messaging using apps and carrier services), as well as mobile data (not including substantial smartphone usage of Wi-Fi), voice and messaging volumes on U.S. mobile networks have dropped since 2012, according to CTIA. Data usage climbed dramatically, as you likely would guess.

One obvious conclusion is that the volume (not necessarily the revenue) of traffic has shifted dramatically from carrier apps (voice, messaging) to “dumb pipe” internet access. That is a different matter from any arguments we might make about the volume or importance of connectivity services overall.

source: CTIA

It also is safe to argue that, over the coming decade, the amount of traffic represented by carrier video will grow dramatically. That will not always have direct repercussions for every mobile service provider. For AT&T, DirecTV Now will represent both a new “application” and subscription revenue source.

For Verizon, video might represent advertising revenue more than video subscriptions. For Sprint and T-Mobile US video is most likely simply to represent growth of data usage.

The amount of revenue upside hinges on the types of video strategies adopted and the success mobile service providers have at shifting video viewership to mobile modes. The U.S. video subscription business represents about $120 billion in direct annual revenue.

Mobile advertising is some fraction of the perhaps $70 billion in TV advertising.  

source: Strategy Analytics

Age Cohorts Shape Potential Mobile Adoption

Mobile adoption in Sub-Saharan Africa reached 44 percent in 2017. So a casual observer might argue the market has lots of room to grow. But adoption rates have slowed recently, with compound annual growth rates (CAGR) for the next five years around half the level recorded over the preceding five years, according to the GSMA.

Given global average adoption rates of 66 percent, Sub-Saharan Africa has more room to grow. But demography is an issue. About 40 percent of the region’s population is below the age of 16.

That makes a difference in addressable population. Compare Sub-Saharan Africa with East Asia and Southeast Asia, where more people are older than 14.

source: World Bank

So adoption rates in Sub-Saharan Africa by people older than 16 is perhaps 87 percent.

So the subscriber base will grow at a CAGR of 4.8 percent between 2017 and 2022, GSMA predicts.

But that is a deceleration from the double-digit annual growth rates seen in the first half of the decade.

As a result, penetration rates will see only modest increases from current levels, GSMA says. The penetration rate is forecast to reach 50 percent by the end of 2023, and 52 percent by 2025.

Wi-Fi Versus 5G is Not Really a Choice

Observers of Wi-Fi and mobility have for decades pondered the question of whether Wi-Fi could become a replacement for mobility networks. It's an interesting exercise, but always has proven irrelevant. 

Both mobile networks and Wi-Fi (basically a radio tail for a fixed network) are established parts of the access picture. That is unlikely to change in the 5G era. 

Some Innovations Take Decades to Become Commercialized

Ideas sometimes take decades to emerge as commercial realities, something we will likely see with artificial intelligence, internet of things, connected cars, and possible even edge computing.

Decades, not years.

Consider the ways Wi-Fi-based voice of the type cable TV operators offer. The basic idea is to connect smartphones to cable Wi-Fi at home and in other public or work settings, using leased mobile network access (mobile virtual network operator) for truly “on the go” access.

Or, consider a newer approach that might blend leased access (MVNO) for “on the go” access, with use of “owned”  licensed spectrum for at=home access, and then Wi-Fi as a filler elsewhere when users are stationary.

Broadly speaking, the use cases include use of the mobile network outdoors and away from home, with use of the fixed Wi-Fi or small cell network when users are stationary at home, at work or other venues.

Cogeco, the Canadian cable TV operator, is looking at a “hybrid” model using its own small cells and licensed spectrum when customers are at home, with leased access (MVNO) when users are out of the house or moving.

“Today, we remain interested in offering wireless services to complement our service offerings to customers within our traditional cable footprint and grow our share of our customers’ telecommunications spending,” says Louis Audet, Cogeco CEO. And Cogeco believes it can use its fixed network to support 5G small cells to supply smartphone service to its customers at home.

That bears a striking resemblance to a late-1980s concept known as “personal communications service.”

In the early 1990s, at a time when mobile service was not used by most people, and was expensive, it was thought there was a market opportunity for a new type of service that would be halfway between cordless indoor telephone service and fully-mobile outdoor service.

Known as personal communications service, PCS would support communications outdoors at pedestrian speeds, would function as a cordless phone indoors, but would not support full mobility at auto speeds.

NTT, in fact, marketed Handyphone service in which a handset functioned both as a cordless phone in the home and as a mobile phone outside the home. As it turned out, rapid price declines for full mobile service eroded the potential market.

The market niche for PCS and Handyphone never was sustainable, once mobile became affordable for the mass market.

So even where new spectrum was made available for “Personal Communications Service (PCS),” it mostly lead to the entry of new firms into the mobile business. In the U.S. market, Sprint and what became T-Mobile US into the U.S. mobile market, using 2-GHz “PCS” spectrum. The original thought was that PCS would be a pedestrian speed network, supporting cell tower handoff at pedestrian speeds.

Later, Cablevision Systems Corp., which studied and then shelved the idea, eventually did launch a similar service, essentially mobile phone service using unlicensed Wi-Fi spectrum exclusively. Much as did PCS, it never took off.

But, in a different form, we now see cable TV and even mobile firms looking at small cells to support at-home or other stationary access (akin to use of Wi-Fi offload), with reliance on a mobile network (owned or leased facilities) for full mobility and out-of-home access.

5G Will Flip Mobile Economics Upside Down

5G fixed wireless is more than clever; more than a way to use a mobile platform to compete with fixed network internet access providers for the first time.

No, 5G fixed wireless represents a fundamental reworking of assumptions about mobile network cost and retail pricing of mobile data consumption; a change so radical it essentially flips the mobile network cost model on its head.

Keep in mind that mobile internet access always has been a high cost, low usage proposition in most countries because the costs of delivering bandwidth are so high, relative to fixed networks.

The big challenge for firms such as Verizon, which want to build new 5G-derived platforms to supply fixed wireless, is that it necessarily involves becoming a low-cost, high-usage platform.

That is a a fundamental change from being a high-cost, low-usage provider.

Basically, cost per gigabyte has to drop by an order of magnitude (10 times) or more.

Ironically, the fear that service providers would not be able to afford to build and operate such networks seems to be proving manageable, as firms including Verizon say they will not be boosting capital investment budgets even as 5G is deployed.

In other words, there is reasonable hope that 5G networks offering orders of magnitude better performance also will be affordable enough to compete head to head with fixed networks as suppliers of internet access.

“A prerequisite for continued data usage growth is that the total revenue per gigabyte is low,” say analysts at Tefficient. In some markets, such as the United States, Canada and Switzerland, where tariffs actually have been high and usage has been low, a disruptive challenge is coming from (of all things) Verizon, one of the biggest incumbents in the market.

What Verizon must do, in using 5G fixed wireless to compete head to head with other fixed network internet service providers, is flip the economics on its head.

Where tariffs are low, usage is higher, as you would expect. And that is the case in the U.S. market, which has high mobile data tariffs, and low usage. To compete against fixed network service providers, Verizon will have to be operate as a supplier of low tariff, high usage services, the polar opposite of where it is now in its mobile business.

And that is among the most-astounding facets of the strategy of using 5G both as a fixed wireless and a mobile platform. Such a blending arguably would have been impossible before the era of commercialized millimeter wave spectrum, cheaper small cell radios, fiber-deep networks, better radios and modulation techniques, cheap signal processing, massive multiple-input, multiple-output radios and even new ways to integrate unlicensed and shared spectrum.

Taken together, all those technologies are the foundation of Verizon’s effort to flip the network cost model so much that it can literally move from being a  “high cost, low usage” provider to being a successful supplier of “low cost, high usage” internet access, in a single mobile generation.

source: Tefficient

5G Will Bring Orders of Magnitude More Capacity

Each mobile generation has brought with it an order of magnitude (10 times) increase in data bandwidth. And even if theoretical top speeds are not universally available, the point is that speeds now are fast enough to support nearly every consumer or business user conceivable app or use case.

As latency improves, there will be few, if any, enterprise apps that cannot be supported by 5G. Assuming mobile operators can get costs in line, the real possibility exists to displace a high amount of cabled network access using fixed or even mobile wireless.

source: CTIA  

It is hard to underestimate the changes in spectrum availability (data capacity) to be made available in the 5G era, including new millimeter wave spectrum (both licensed and unlicensed), spectrum sharing, use of small cells, new radios and modulation schemes. Consider that, in the U.S. market, mobile operators can use 716 MHz of spectrum, total.

But the U.S. Federal Communications Commission is working to release 11 GHz of millimeter wave spectrum, with the possibility of commercializing up to 13 GHz to 14 GHz worth of new additional millimeter wave capacity, for about 24 GHz of new physical capacity.

In other words, mobile capacity (spectrum) could increase as much as 30 times. Multiplying the use of that spectrum using small cells could mean actual capacity increases of perhaps two orders of magnitude (100 times).

The point is that, in the 5G era, mobile network cost per bit will approach fixed network cost per bit, opening the possibility of full mobile or wireless substitution for fixed internet access.

And that will make full mobile or wireless substitution for the cabled network feasible, at scale, for the the first time.

source: CTIA