What 2% of GNI per Capita Implies About Network Choices

One measure of internet access affordability used by governmental and other agencies are target prices for retail access no higher than two percent of gross national income (GNI) per capita, for gigabyte usage allowances. 

As a practical matter, that implies use of a mobile network, given the cost differences between a mobile and a fiber-to-home network. 

The varying GNI per capita in developing countries also poses an issue. When adjusted for purchasing power parity, many countries have GNI per capita below $15,000 per year, for example. So two percent of $15,000 implies annual spending for internet access no higher than 

$300, or about $25 per month. 

Fixed network costs might be possible at that level, but not very often, and then only assuming the household used zero mobile services. Since most people prefer mobile over fixed service, if they must make a choice, that further ensures that mobile networks will be the focus of reaching the two-percent of per-person GNI targets.  

In countries with lower PPP GNI per capita, where the level might be $3,000 per year, annual internet access cannot cost more than $60, or about $5 a month. Under those circumstances, a fixed network might be virtually impossible. But most countries would have a chance to supply internet access at such prices, using a mobile network. 

One can operate a mobile network, especially using 3G or 4G, and remain in business, with a moderate amount of competition, supplying 1 GB of data usage per month, in most countries. 

Of course, average global data consumption already exceeds 15 GB per month, according to Ericsson figures. Smartphone data consumption in 2023 will be in the range of 20 GB per device. 

source: Ericsson 

Such retail cost targets also condition the level of investments that can be made which are sustainable, as well as the platforms and packaging strategies that might be necessary. Phone accounts obviously have some upside from voice and text messaging, sometimes banking or payments revenues, even when fixed network revenue streams are not available. 

source: Omdia, World Broadband Association

Still, for most service providers in most markets, internet access remains the growth driver of greatest importance.  And most internet service providers, in the toughest markets, will rely on mobile networks to provide access. FTTH economics simply are not feasible in markets where total monthly spend on internet access is a few dollars per month.

Network Slice or Something Else? It Depends

There always are multiple ways to solve a capacity or function problem using a communications network, as these are engineering decisions, and all such decisions involve trade offs. No one solution always works for every problem. 

In that regard, there clearly are capacity limitations on early 5G  network slicing networks. It is not possible, at the moment, to support unlimited virtual private networks. The issue is “how many” can be supported. 

The alternatives become more valuable as the ability to support a network slice diminishes. If the objective of the slice is to reduce latency, ensure quality of service or bandwidth, then edge computing, premises computing, dedicated capacity and redundant connectivity links all are alternative solutions. 

source: TechTarget 

Right now, if asked how many slices can be supported, the answer is that it depends. Even when use cases might be local, such as many or all devices on a campus, capacity of the core network is invoked. In principle, could a slice be localized? Yes. That is essentially what private 5G networks do. But if so, is a network slice actually needed?

And if the objective is latency performance, in many instances an SD-WAN, leased private capacity or an owned transport network or edge computing could suffice. In other cases, where the performance must be supplied on a highly-distributed basis, such as to support gamers at many distinct locations, a network slice might be the best solution.

Is the Connectivity Business Healthy or Not; Poised for Higher Growth, or Not?

What is the financial state of the connectivity business, especially the mobility part of the business that drives most of the incremental revenue growth? Some might argue things are, if not fine, promising. Some mention 5G, the centrality of internet apps to support modern life and business, home broadband and other measures of connectivity importance as evidence the industry is well positioned to prosper. 

Service providers themselves, in asking for payments for a few hyperscale app and content providers, basically argue matters are not fine, and that internet service providers require taxes on some interconnected internet domains to remain solvent. 

source: Researchgate 

By most financial measures, the business has gotten tougher for several decades, though “telecom” never was a fast growth industry, so slow revenue growth is not unusual, on the order of two percent a year, though some estimates peg growth at higher rates, especially in Asia-Pacific region, for example. Revenue and profit margins remain issues, though.  

Profits, though, are another matter. The average service provider profit margin around 12.5 percent is typical, and not unusual for many industries.  

Since the global industry moved from monopoly to competition, excess profits have been removed, though by some measures, including growth in lesser-developed regions and including new contestants and well as legacy service providers, profit levels might be higher, globally, than in 1995, for example. 

Also, the global averages can conceal higher or lower growth rates in various regions, as well as differing performance by company.  

All that, however, does affect public market valuation and capitalization, as market multiples are assigned by expectations about revenue growth. The lower the multiple, the lower the valuation and market cap. And since equity value is currency, a firm with low-value currency will have a tough time buying a firm with high-value currency. 

That explains why most telcos cannot afford to acquire assets of the likes of Facebook, Google, Apple or Amazon. 

More significant, though, is the rise of the internet, which operates on a disaggregated basis, using layers that are conceptually distinct and business functions that are handled by different parts of the value chain and ecosystem. 

In other words, users can access applications and services that are not “owned” by a connectivity provider, as once was the case. App providers do not need either permission or a formal business relationship with any internet service provider to connect with users and customers. 

That is the main meaning of the term “over the top.” App providers can go straight to their users and customers over any lawful local  internet connection. That also affects connectivity provider options, as it no longer is possible to create walled garden apps that are tied to a particular ISP. 

And though connectivity providers likely would prefer to be in the applications and commerce parts of the ecosystem, given the higher growth and profit margins, repositioning in that way is difficult. Ignoring for the moment domain knowledge and skills, gaining a substantial position in the applications part of the internet ecosystem is financially daunting. 

Because the at-scale hyperscalers have market valuations that are higher than that of connectivity providers, and because those revenues carry higher market multiples, the cost of acquiring a major position is unrealistic. 

In recent years we have watched AT&T, for example, spend heavily--and borrow heavily--to support movement into local access, content and linear video. Ultimately, those efforts failed as the debt burdens could not be carried. 

Some earlier acquisitions--of mobility assets, for example--have worked out much better, in large part because organic growth was possible. Scale could be built, rather than having to be acquired.  

The bottom line is that the current state of the global connectivity business is not completely clear. Growth is higher in developing regions; quite low in developed regions. Again, that is not historically unusual at all. What we used to call “telecommunications” always was a slow-growth industry.

In the competitive era, growth is more important as legacy market share is lost to new competitors. It is akin to a leaky water bucket. New water has to be poured in at the top since water continually leaks out the bottom of the bucket.

When Advanced Infrastructure Does Not Drive Economic Growth

Even if a next-generation mobile network is launched about every 10 years, the actual lifespan of any particular generation can extend for a few decades, in part because the legacy network has value even after the next generation starts to be commercially deployed. 

Also, any new next-generation network is adopted first in some regions and later in others. 

source: Ericsson 

5G,for example, is most available in Europe, North America, East Asia and parts of the Middle East. 5G should then roll out on a wider basis to India, Southeast Asia, Latin America, Eastern Europe and Sub-Saharan Africa.  

But 4G will still be a significant commercial network by about 2030 in many of those regions. 

That is true of almost all fixed network deployments as well. Within any single country, deployment begins first in the urban areas and suburbs. Only later does service appear in smaller towns and then rural areas. 

Some might be tempted to argue that if 5G deployment were to happen faster in a trailing region, that economic outcomes might be significantly or notably higher. The theory will always be hard to validate. 

Historically, next-generation networks are built where the demand is greatest, and the payback easier. That is the urban and suburban regions of any country. Such regions of countries already have customer density and economic activity levels that make adoption more likely, as well as typical recurring revenue levels that are more favorable than in rural areas, generally. 

In other words, advanced networks are built where the greatest chance of early financial returns are possible. Deploying such networks first in the most-difficult places is risky, as it delays a return on investment. 

By analogy, we might also argue that deploying a next-generation network in a low-density, rural area with few enterprise customers and less economic activity overall than an urban area is quite unlikely to result in near-term boosts of economic activity. 

In other words, the argument that better broadband or the latest mobile network will lead to higher economic growth is questionable. Growth happens in urban areas in part because the population is greater, hence all markets and the volume of economic activity are bigger. 

Simply building high-quality home broadband or the latest-generation mobile network in a low-density area with relatively-little existing economic activity will not change matters, in and of itself. 

Normally some level of subsidy is required, and even then, the outcomes desired are more along the lines of social inclusion rather than serious expectation of a dramatically-changed economic growth rate.

Can Mobile Operators Become Something They are Not?

Can mobile service providers become something they are not? Can they change their revenue models to move beyond connectivity and subscriptions?

That question often is in the background of all efforts to “move up the value chain,” enter new parts of the internet ecosystem, radically change revenue and business models or create new products and services that extend beyond connectivity. 

In other words, telcos once were functionally monopoly suppliers of voice services over fixed networks. These days they are more aptly known as internet service providers who also deliver voice communications over mobile and fixed networks. 

There are a smattering of other services and products some telcos supply, but the core revenue driver remains subscriptions, data connectivity and some declining amount of voice and messaging. 

Most efforts to become platforms, techcos or digital service providers have the intention of moving connectivity providers into different roles within the ecosystem. As a practical matter, the simple motivation is growing revenue and attaining profit margins more akin to software and app firms. 

source: McKinsey 

Thinking about such questions uses different language at different times. 

A recurring discussion over the past couple of decades has been held over the question of whether telcos could become platforms. Perhaps the latest version of this debate asks the question of whether telcos can become techcos or digital services providers. 

None of these concepts are easy to explain, or commonly understood. Some might argue the “digital services provider” evolution means offering services such as internet of things, connected cars, smart cities or smart homes. Presumably the concept is that a connectivity provider supplies the apps that provide the value. 

So a connectivity provider acts as a home security firm, an industrial IoT system supplier, a connected car app, traffic management system or energy management firm. In other words, the connectivity provider is the branded developer and provider of the application, not just the connectivity provider supporting any app or use case. 

It is no easier to explain--and have people agree upon--what a “platform” or “techco” evolution means. 

It never is completely clear why telco executives really mean in touting the transformation from telco to “techco.”

Many telcos--or those who advise and sell to them--say telcos need to become techcos. So what does that mean?

At least as outlined by Mark Newman, Technotree chief analyst and Dean Ramsay, principal analyst, there are two key implications: a culture shift and a business model.

The former is more subjective: telco organizations need to operate “digitally.” The latter is harder: can telcos really change their business models; the ways they earn revenue; their customers and value propositions?

source: TM Forum

It might be easier to describe the desired cultural or technology changes.  Digital touchpoints; higher research and development spending; use of native cloud computing; a developer mindset and data-driven product development or use of use artificial intelligence all might be said to be part of becoming a “techco.”

Changing the business model is the more-problematic objective. 

As helpful as it should be to adapt to native cloud, developer-friendly applications and networks, use data effectively or boost research or development, none of those attributes or activities necessarily changes the business model. 

If “becoming a techco” means lower operating costs; lower capital investment; faster product development or happier customers, that is a good thing, to be sure. Such changes can help ensure that a business or industry is sustainable. 

The change to “techco” does not necessarily boost the equity valuation of a “telco,” however. To accomplish that, a “telco” would have to structurally boost its revenue growth rates to gain a higher valuation; become a supplier of products with a higher price-to-earnings profile, higher profit margins or business moats. 

What would be more relevant, then, is the ability of the “change from telco to techco” to serve new types of customers; create new and different revenue models; develop higher-value roles and products or add new roles  “telcos” can perform in the value chain or ecosystem. 

We face the same sorts of problems when trying to explain what a “platform” looks like. 

Korea Telecom wants to become a digital platform company, not a telco. That ambition arguably is shared somewhat widely among tier-one connectivity service providers globally and has been a strategy recommended in some form by most bigger consulting companies. 

Simply, becoming a platform company changes the business model from direct supplier of products to a role as an ecosystem organizer or marketplace. That arguably is an aspirational goal more than anything else. 

What that aspiration means in practice is that KT as a digico “will shift our focus from the telecommunications sector, where growth is stalled due to government regulations, to artificial intelligence (AI), big data, and cloud computing businesses to become the nation's number-one platform operator in the B2B market," said KT CEO Koo Hyun-mo.

So there are qualifications. KT, if successful, would become a platform in the business market, not the consumer market. It would explicitly aim to become the center and organizer of an ecosystem for artificial intelligence, big data analytics and cloud computing. 

Purists and researchers will likely argue about whether all of that actually adds up to KT becoming a platform, in the sense that Amazon, eBay, Alibaba, ridesharing or lodging apps  might be considered platforms. 

A platform, definitionally, makes its money putting buyers and sellers and ecosystem participants together. In computing, a platform is any combination of hardware and software used as a foundation upon which applications, services, processes, or other technologies are built, hosted or run.

Operating systems are platforms, allowing software and applications to be run. Devices are platforms. Cloud computing might be said to be a platform, as systems are said to be platforms. 

Standards likely are thought of as platforms by some. 

In other cases components such as central processing units, physical or software interfaces (Ethernet, Wi-Fi, 5G, application programming interfaces) are referred to as platforms. Browsers might be termed platforms by some. Social media apps are seen as platforms as well. 

The platform business model requires creation of a marketplace or exchange that connects different participants: users with suppliers; sellers with buyers. A platform functions as a matchmaker, bringing buyers and sellers together, but classically not owning the products sold on the exchange. 

A platform orchestrates interactions and value. In fact, a platform’s value may derive in large part from the actions and features provided by a host of ecosystem participants. Facebook’s content is created by user members. Amazon’s customer reviews are a source of value for e-tailing buyers. 

Consumers and producers can swap roles on a platform. Users can ride with Uber today and drive for it tomorrow; travelers can stay with AirBNB one night and serve as hosts for other customers the next. Customers of pipe businesses--an airline, router or phone suppliers, grocery stores-- cannot do so. 

So KT can increase the percentage of revenue it earns from supplying digital, computing, application or non-connectivity services without becoming a platform. As a practical matter, that is what most telco executives have in mind when talking about becoming platforms. 

For KT, even limiting its ambitions to generating more digital and non-connectivity revenue does not make it a platform. That would still be an important, valuable and value-sustaining move. But KT has a very long ways to go, even in its stated objectives of becoming a B2B platform.

Total KT revenue is about 24 trillion won. All B2B revenues at the end of 2020 were about 2.78 trillion won (about 11.5 percent). Information technology services were about 1 trillion won, or about four percent of total revenues. AI and other digital services were about 0.5 trillion won, or about two percent of total revenues. 

It might be a long time between non-connectivity revenues in the B2B part of its business are as much as half of total revenues. And those revenues might not represent a platform transformation of the business model.

KT could win significantly without ever becoming a platform. And some might argue few telcos can ever actually hope to become platforms in the classic sense. Perhaps the more important goal is simply to reduce reliance on traditional connectivity revenues.

Unfortunately, what platform, techco or digital services provider actually means in practice falls far short of the grander visions. We still have no conclusive answer to the question of whether telcos can become something they are not.

5G and 6G Hype is Real, But Also Does Not Matter

It is not too hard to find critics who say 6G being overhyped, as was 5G. Though true, such criticism also is largely irrelevant. On either fixed or mobile networks, we see major upgrades of capacity at least every decade. For mobile operators, that coincides with the launch of a next-generation network. 

The fixed network process is less structured, but still happens. Edholm’s Law states that internet access bandwidth at the top end increases at about the same rate as Moore’s Law suggests computing power will increase. Basically, that results in an order of magnitude (10 times) increase in the headline internet access bandwidth about every five to six years. 

Nielsen's Law essentially is the same as Edholm’s Law, predicting an increase in the headline speed of about 50 percent per year. 

Ignore all the hype about new services. Fixed and mobile networks have to keep increasing bandwidth every decade. On fixed networks, bandwidth increases by an order of magnitude about every five years. 

Nielsen's Law, like Edholm’s Law, suggests a headline speed of 10 Gbps will be commercially available by about 2025, so the commercial offering of 2-Gbps and 5-Gbps is right on the path to 10 Gbps. 

source: NCTA  

Headline speeds in the 100-Gbps range should be commercial sometime around 2030. 

Mobile networks--because of the need to allocate new radio frequency spectrum, add an order of magnitude of new capacity about every 10 years based on new spectrum. Use of small cell architectures can add more capacity on existing and new spectrum, as well. 

Sure, 5G and 6G will be overhyped. But it does not matter. We will need the new networks simply to keep up with capacity demand.

Revenue Growth is Key Issue for U.S. Mobile Operators

Revenue growth is arguably the paramount strategic concern for access service providers in developed markets that are virtually completely saturated, meaning almost every person who wants to use mobile devices and networks already is a customer. 

In the U.S. mobile market, for example, revenue growth has been slowing. 

source: Lightshed Partners 

But connectivity service provider revenue growth rates have been slowing globally as well. Growth rates of about 2.4 percent are predicted by Analysys Mason. IDC is a bit less optimistic, forecasting 1.9 percent growth over the next five years. 

Looking only at fixed broadband and mobility services, Omdia predicts growth of up to 14 percent. Total revenues will grow at negative or slower rates, as voice, messaging and enterprise revenues contract in many markets. 

Precedence Research thinks revenue growth could reach nearly five percent per year through 2030. Most of that growth, everyone expects, will come in developing regions which are adding subscribers. 

In developed regions, growth will be quite slow because of market saturation. 

The issue for some leading mobile providers is growing competition from cable industry providers, with some additional danger from Dish Network, a new 5G mobile network provider. T-Mobile has been the aggressor, taking market share steadily on a “value” platform, but also now on a “network quality” dimension, as many surveys show end user experienced speeds on T-Mobile’s network rival those of Verizon, which historically has positioned itself as the quality leader, with higher average revenue per account.

Losing the clear “quality” positioning undermines the argument for a price premium Verizon wants. 

AT&T’s mobile market positioning has seemed unclear to some of us. AT&T has not been the clear “network quality” leader or the “value” leader. That might help explain why AT&T now has fallen to be only the third-biggest service provider by accounts. 

So perhaps the biggest single influence on subscription revenue will continue to come from market share shifts between T-Mobile, Verizon and AT&T, in both consumer and business segments. Over the past year, both T-Mobile and AT&T have been taking share. 

Efforts to boost average revenue per account will help, as well new accounts supporting internet of things devices. How much that will matter remains to be seen, as account shifts will probably matter most. 

Maintaining or raising prices in a competitive market never is easy and arguably is doubly hard in saturated markets. 

It is a problem service providers in all markets increasingly face.

Cable Denies Fixed Wireless is a Long-Term Threat, But Near Term? Another Story

There’s a good reason why cable operators dismiss the long-term  threat of fixed wireless internet access: they do not believe capacity growth can keep pace with fiber to home or hybrid fiber coax, long term. 

Whether a fully correct assessment or not, those long-term  reasons are reasonable. In the near term, on the other hand, fixed wireless is a major weapon for shifting market share from cable to Verizon or T-Mobile platforms. 

In its report on fixed wireless, T-Mobile notes that over the past year, fixed wireless accounted for 78 percent of  total home broadband net account additions, counting only gains from Verizon and T-Mobile. Other independent wireless internet service providers virtually certainly made some gains as well. Those estimates used data from Leichtman Research Group and Openvault. 

source: T-Mobile 

Some might argue that T-Mobile and Verizon are getting switchers from the price-sensitive segments of the market. T-Mobile might argue it is picking up rural market customers.But rural customers are only the second-biggest source of accounts. In fact, suburban accounts lead the account  additions. 

source: T-Mobile 

But price seems to be a driver of switching behavior, in any case. Some 58 percent of switchers cited “lower price” as the top driver of behavior. 

Close to half of switchers reported that “no contract” obligation was a motivator. 

“Speed” is a lesser driver of behavior. 

source: T-Mobile

T-Mobile and Verizon are expected to have 11 to 13 million total fixed wireless customers by the end of 2025. If total U.S. internet  accounts are somewhere on the order of 111 milliion accounts, and if small business users account for 11 million of those accounts, then home users might amount to about 100 million accounts. 

source: Ooma, Independence Research 

If Verizon and T-Mobile hit those targets, their share of the home broadband market--counting only fixed wireless accounts-- would be about 10 percent. Significantly, most of those accounts will be gained “outside of region” for Verizon. That is significant as Verizon’s fixed network only reaches about 20 percent of U.S. households. Fixed wireless allows Verizon to grow its account base among the 80 percent of U.S. home locations that cannot buy Verizon fixed network service. 

For T-Mobile, which in the past has had zero percent market share in home broadband, all of the growth is incremental new revenue. If those accounts add $600 per year in added revenue, then the 11 percent share of home broadband supplied by fixed wireless represents perhaps $6.6 billion in new revenue for the two firms. 

That is a big deal, considering how hard it is for either firm to create a brand-new line of business that generates at least $1 billion in new revenue. 

The other apparent takeaway is the size of the market segment that cares more about price than performance. 

Segments exist in the home broadband business, as they do in many parts of the digital infrastructure and digital services businesses. In other words, even if some customers want faster speeds at the higher end of commercial availability, up to 20 percent of the market cares more about affordable service that is “good enough.”

The center of gravity of demand for 5G fixed wireless is households In the U.S. market who will not buy speeds above 300 Mbps, or pay much more than $50 a month, at least in the early going. T-Mobile targets speeds up to 200 Mbps. 

During the third quarter, about 22 percent of U.S. customers bought service at speeds of 200 Mbps or below. In other words, perhaps a fifth of the home broadband market is willing to buy service at speeds supported by fixed wireless. 

source: Openvault