Mobile and Fixed Network Capex Assumptions are Changing

For those of you who follow mobile and fixed infrastructure payback models, we need to forget what we think we know. In the mobility realm, costs of infrastructure and expectations about indoor coverage are changing as we shift to higher frequencies which have severe limitations reaching inside buildings.

A shift to small cell architectures, certain to intensify as we move to xG networks beyond 5G, will shift capital investment assumptions as well.

All that occurs as revenue per account levels continue to decline, if at a slower rate than over the past couple of decades.

Fixed network models are shifting as well. Both cable operators and telcos have revised assumptions about payback from FTTH upgrades and the timing of such upgrades.

In yet one more sign of changing fixed network infrastructure costs, Virgin O2 is reportedly in talks with infrastructure funds to create a facilities-based U.K. alternative to Openreach.  The goal is to create new fiber-to-home coverage of seven million homes. 

Virgin O2 already has said it would upgrade all current 15.5 million gigabit connections to FTTH by 2028. 

Though the big story is the creation of a nationwide facilities alternative to Openreach. The new network would have Virgin O2 as an anchor tenant, but the network would also offer wholesale access to third parties. 

To be sure, since the U.K. market essentially has had two tier-one firms competing in the fixed access market--cable TV and telco--the shift is not new in principle, but new in coverage and ubiquity. 

The proposed additional upgrades of the full network, plus addition of seven million new locations, would create a second nationwide FTTH provider with wholesale access. 

Secondarily, the move ends the historic cable reliance on hybrid fiber coax--in the United Kingdom--forever. 

Also, the financing and business model for FTTH also changes. Where cable companies historically have financed all of their own access network, the new move creates a new entity to own the access infrastructure.

Setting up the new entity changes the payback model for FTTH deployment, even as it shares the revenue and profit upside with new investors. 

But infrastructure has taken on greater importance in private equity and institutional investor portfolios in recent years. So the desire by Virgin O2 to invest is matched with matching desire by investors to fund and own such infrastructure. 

All of our decades-long assumptions about FTTH payback models are thereby upended. In principle, co-investment is one solution for revenue assumptions that have drifted downwards from perhaps $130 a month to $170 per month in revenue to a more-dependable $50 per month to $70 per month revenue per household. 

Revised payback models therefore must be revised accordingly.

xG Mobile "Inside the Building" Could be Moving in the Direction of Private Networks

Mobile coverage inside the building has been one key differentiator between mobile and fixed communications. Fixed networks terminate on the side of the building: the public network ends there. 

The premises network has always been the domain of private networks: cabled local area networks or Wi-Fi, for example. 

Use of higher radio frequency spectrum has, over time, created more issues for mobile operators in terms of indoor coverage. In the 4G era, all those neighbors of yours talking on their phones on their porches provide testimony that higher-frequency signals have a tougher time passing through brick, for example. 

As the global industry starts to use mid-band frequencies, those issues will intensify. When we start using millimeter and eventually teraHertz frequencies, the issues will compound. 

The big takeaway is that mobile networks increasingly will function as outdoor networks. Indoor networks increasingly will become private networks. As building tenants now expect infrastructure for inside wiring and connections to high-speed, high-capacity public networks, demand will likely intensify on building owners to enable indoor mobile coverage. 

Some period of customer uncertainty and unhappiness is sure to precede such developments at scale. The resolution can take several forms, including better and faster Wi-Fi infrastructure (though that primarily rests on each tenant and perhaps secondarily their chosen access provider). Perhaps Wi-Fi offload becomes more important in the 5G and subsequent eras of mobile platforms. 

Perhaps mesh networks will suffice in some cases, aided by indoor signal boosters and range extenders as now exist for Wi-Fi. Maybe fixed wireless can be configured to help, using window-mounted receivers that then rebroadcast signals indoors. We already retransmit using Wi-Fi. Will we be ble to--or want to--retransmit directly in mobile signal format?

Customers will expect their devices to work indoors. Precisely how we enable that--at scale--is yet  undetermined. Even as Wi-Fi has become the default indoor interface, the value of Ethernet cabled connections remains. 

In some cases, might xG use both Wi-Fi and Ethernet for indoor signal distribution? Might the indoor xG  realm become a private network venue as has been the case for fixed networks and private networks?

Verizon Sees ARPA Lift from Premium Unlimited Plans, But What Follows?

In the fourth quarter of 2021, 74 percent of Verizon mobile customers subscribed to an unlimited plan, up from 71 percent in the third quarter. Just over 33 percent of unlimited subscribers are on unlimited premium plans, so Verizon can be expected to strive mightily to move customers up to the premium plans.

In the near term, though fixed wireless and prepaid will help, the biggest revenue opportunity is growing average revenue per account by means of a shift of accounts from lower-priced usage-limited plans to higher-priced unlimited usage plans.

We already can speculate that, eventually, once Verizon has moved most of its customers up to the highest tiers of service they wish to buy, some other major packaging shift will have to be discovered.

In past decades the revenue growth path has been based on text messaging, then internet access, then bundles (especially multi-user plans, which reduce churn). Other initiatives which have contributed, with less total revenue impact, have included content services, contracts, changes in device bundling, internet of things connections, business account policies and prepaid.

AT&T leadership already has speculated that some shift to "internet access wherever you are," which would necessitate use of both fixed and mobile assets, could be a possible shift. The value for consumers would be "just keep me connected," in other words.

MediaTek Provides View of 6G

MediaTek believes 6G will bring speeds 10 times to 100 times faster than 5G. That is not an unusual prediction. Indeed, every mobile digital generation has increased bandwidth by 10 times to 100 times, and reduced latency about 10 times, each generation.

source: MediaTek

Devices might also have the ability to sidelink, much as current devices can use Bluetooth for short-range device-to-device communications. 

 source: MediaTek

Other changes are possible. “A distributed MIMO deployment, where Tx-Rx signal pairs are not just bound to one node/site but distributed across multiple sites and nodes, has the ability to improve spectral efficiency and user experience across an area,” MediaTek says. That would not eliminate the use of transmitting “cells,” as the architecture is described as “cell free,” but rather mean user devices could communicate with more than one radio site at a time. 

There would still be transmission cells, but user devices would be free to connect with any adjacent cells and not be restricted to a single tower or radio. The practical advantage for end users is that the edges of a cell would no longer be a transmission quality issue. 

With a traditional one-cell connection design, lower signal strength at cell extremities has always meant reduced signal quality. In the cell-free design, signal quality close to the radio would be the same as quality at the edge of any single  radio’s coverage. That includes the degree of packet loss. 

The ability to incorporate non-terrestrial (satellite) connections with mobile connections also is envisioned. Artificial intelligence should be a native capability. 

In the spectrum area, frequencies in the 7 GHz to 24 GHz bands will probably be parts of the 6G standard, as will spectrum sharing, MediaTek says.

How Much Mobile Substitution for Home Broadband is Possible?

Mobile substitution has been a key trend in the global connectivity industry, occurring n phases, and affected a wider range of products over time.

Mobile voice supplanted fixed voice as the preferred consumer use case. "Mobile substitution" for voice has been a global trend since the advent of 2G networks. In fact, mobile is the only sort of ubiquitous network in most parts of the world. But that now might become an issue for internet access as well.

“I will say over time--a three to five year time horizon--unequivocally 5G will serve as a broadband, a fixed broadband replacement product,” former AT&T CEO Randall Stephenson said. “I am very convinced that that will be the case.”

“Back in the 90s everybody was saying wireless would never serve as a substitute for fixed line voice because there wasn't sufficient capacity,” Stephenson said. “Well it is a substitute for voice.”

Mobile messaging displaced voice. Mobile social media displaced fixed modes. Mobile turn-by-turn navigation displaced dedicated GPS devices and maps.

Mobile phones displaced watches, cameras, music players and flashlights. Mobile entertainment video is encroaching on fixed modes of viewing (TV sets, PC or tablet screens).

Mobile internet access, which began to find niches in the 3G era, found many more use cases in the 4G era (both for home broadband replacement and on-the-go access). In developing regions, mobile internet access is the preferred form of access.

The issue now is how much mobile substitution will occur in the home broadband business. A key assumption is how much bandwidth customers really need, at what price points, before the decision to substitute mobile internet access for fixed access makes sense. 

Much depends on whether multi-user support is required, and if so, how many simultaneous users are expected. The number of supported devices also matters. So do the typical use cases. 

Price also matters. If 38 percent of users buy services in the 100 Mbps to 200 range, paying roughly $50 a month, then it is possible most customers will expect to pay less for slower speeds, even if they also expect to pay more for faster speeds. 

source: Openvault 

Another implication of buyer patterns in the U.S. market is that nearly 56 percent of U.S. home broadband customers buy services running no faster than 200 Mbps. A fixed wireless or mobile solution able to supply up to 400 Mbps might appeal to as much as 83 percent of the home broadband market. 

Over time, as always is the case, the speed requirements will move up. The point is that so long as mobile infrastructure can keep relative pace with fixed network improvements, the opportunity to substitute mobile for fixed access will be significant.

Mobile or fixed wireless probably cannot match the highest fixed network speeds. But it does not have to do so. Most customers never buy the "fastest" tiers of service.

How Much Will Mobile Device Demand Decouple from 5G?

With the caveat that the online poll was not intended to be representative of all users, a survey by GSMArena suggests a certain amount of decoupling of demand for devices and networks. 

Some 34 percent of respondents who use 5G phones say they do not use 5G because it is not yet available. And, with the caveat that behavior is likely to change once 5G is widely available, the poll still shows that demand for phones--and phone features--is to some extent possibly disconnected from the attributes of the network the device will use. 

Some popular consumer devices are designed to be used  independently from any mobile network, using Wi-Fi or Ethernet for connectivity, others are designed to use both 4G and 5G, with a default to 4G when 5G is not available. 

source: GSMArena 

But smartphones are only partly utilitarian devices. They also are fashion. Image and personas. So some 5G phone users have purchased 5G devices even in advance of 5G networks being available, which is a new behavior enabled by handset suppliers emphasizing device features other than 5G. 

The larger question is whether substantial percentages of 5G device owners continue to behave this way--owning 5G devices that do not connect to a 5G network--over the longer term. 

The same question might be asked for customers who do not yet think they “need 5G” or do not buy because it “costs more.” Over time, those objections should cease to be relevant.

Where Will We Find the "Next Big Thing" in Consumer Mobilie Services?

It is not yet clear what changes in mobile packaging will replace current drivers of mobile revenue growth. All we know is that, over time, revenue drivers have changed, and will change. 

In the past, voice revenues, then connection volume, then text messaging revenues and then internet access have provided key growth drivers for a time. 

Multi-line accounts were successful, for a time, as a means to grow account value. Perhaps new packaging creating bundles of fixed and mobile service are next. We just do not know, yet. 

For most of the past decade, U.S. mobile operators have relied on moving customers to unlimited plans--at higher prices--to fuel growth. 

Mobile operators hope network slicing emerges as a a key enabler of new mobile service plans, adding both on-demand, dynamic service levels and pricing, plus speed tiers similar to those offered by fixed network providers. 

Traditionally, mobile service plans have been differentiated by usage allowances, not speed. But the virtualized 5G core network can support the creation of end-to-end virtual networks that might be differentiated on a number of performance metrics.

Among the possible changes are speed-guaranteed tiers of service, or services featuring quality of service related to latency. 

That would, in principle, allow mobile operators to offer speed tiers similar to those offered by fixed network internet service providers. Where today mobile services are differentiated by usage allowances, in the future network slicing could enable differentiation by speed tiers. 

Elisa, a Finnish telco, reports that customer-satisfaction scores are around 50 percent higher for customers whose plans afford them speeds of greater than 300 Mbps, compared with those with plans offering less than 100 Mbps, a McKinsey survey suggests.

To be sure, nary an innovation in the mobile business related to any next-generation network fails to elicit a hope that consumers will pay more for some new feature. Such hopes often do not materialize. 

McKinsey believes ARPU lift ranging from five percent to 10 percent is possible simply based on faster 5G speeds, even if offered only on a “best effort” basis. Perhaps a more-realistic expectation is possible three percent to six percent ARPU lift. 

 source: McKinsey 

Further, McKinsey consultants also believe additional ARPU lift of perhaps three percent to six percent in average revenue per user is possible if on-demand features also are offered, such as on-demand and temporary boosts in speed or perhaps latency. 

That might arguably be true for a subset of customers, typically the highest-yielding accounts, for example. 

For example, if a customer needs stronger connectivity to stream a video, play an interactive game, or make an important phone call, they can simply press a button, pay $1 to $2, and receive a temporary performance boost, McKinsey argues.

To be sure, incremental revenue is likely to be earned from new internet of things connections, edge computing, private networks and network slicing. 

Still, consumer mobility still drives volume. So it is there that we will look for the “next big thing” in mobile revenue growth.

U.S. Mobile Operator Capex Might Hit a High in 2022

U.S. mobile operator network infrastructure capital investment might hit a peak in 2022 as all the leading providers speed their 5G network deployments. 

source: Light Reading, Credit Suisse

How Much Fixed Wireless Progress in U.S. Market?

T-Mobile has fixed wireless available to 30 million U.S. households in April 2021. T-Mobile now has perhaps 646,000 fixed wireless supplied home broadband accounts. But T-Mobile projects reaching seven million to eight million fixed wireless customers by 2025 or so. 

Verizon likely had 15 million fixed wireless passings by the end of 2021, with a goal of passing 30 million households by the end of 2023 and 50 million by the end of 2025. 

So far, Verizon has 150,000 home broadband customers using fixed wireless. 

Some believe fixed wireless will represent about nine percent of the U.S. installed base of home broadband accounts by about 2026. 

If the typical U.S. home broadband account generates $600 a year in revenue, then 10.43 million lines represents $6.26 billion in annual service revenues. 

And since most of that revenue is earned in a near zero-sum market, a gain of $1 billion by any provider also corresponds to losses by another provider of about the same amount. 

For a firm such as T-Mobile, with zero market share, that is a significant opportunity. For a firm such as Verizon, whose fixed network passes only about 18 million homes passed by its Fios home broadband network. But Verizon expects to pass as many as 50 million homes using fixed wireless by about 2025. 

Veizon has perhaps seven million (closer to 6.7 million, likely)  Fios home broadband accounts, generating about $1814 to $1895 annual revenue per account, including voice and other services such as subscription television, on annual revenues of about $12.7 billion. 

So fixed wireless revenue per account would seem to be far lower than a Fios account.  

But fixed wireless already represents at least 41 percent of Verizon home broadband passings and will eventually be the dominant home broadband capability possessed by Verizon. By 2025 fixed wireless could represent 70 percent of the locations where Verizon can sell home broadband. 

So even if fixed wireless remains a single-digit percentage of the home broadband installed base, it still represents a primary way some providers will try to take market share from other providers. 

T-Mobile and Verizon are the biggest of possible winners. Cable TV home broadband providers stand to lose the most, simply because they have 70 percent of the installed base. 

What's Next for Mobile Operator Growth After "Unlimited Usage?"

Every several years, it seems, the mobile industry exhausts a former growth driver and has to create a new source of growth. In the past, voice revenues, then connection volume, then text messaging revenues and then internet access have provided key growth drivers for a time. 

Multi-line accounts were successful, for a time, as a means to grow account value. Perhaps new packaging creating bundles of fixed and mobile service are next. We just do not know, yet. 

For most of the past decade, U.S. mobile operators have relied on moving customers to unlimited plans--at higher prices--to fuel growth. 

source: Cowen, Light Reading 

But that inevitably will reach a natural end. Already, one survey finds 77 percent of consumers reporting they already buy such plans. The runway still exists for another 20 percent of the market to be shifted to higher-priced accounts. 

To be sure, the Covid-19 pandemic work from home and learn from home restrictions seem to have boosted net account growth. But nobody thinks that will last. 

So something else will inevitably need to be found to fuel growth, assuming any particular mobile operator cannot rely on market share gains, as T-Mobile, Dish Network, Comcast and Charter Communications expect will drive their revenue growth. 

AT&T and Verizon will have a tough time growing by taking market share. So mobile service account growth will not be the logical driver of growth. There is hope for new revenue from network slicing, edge computing and internet of things connections, to be sure. 

But in the consumer market some new revenue driver will soon have to be discovered.

"How Do We Make Money from 5G?"

Many in the mobile ecosystem ask the question “how will we make money from 5G? What the question likely means is less an uncertainty about revenue drivers (service providers generally know their options) and more a concern about the distribution of value within the ecosystem. 

It is a virtual certainty that 4G and older connections will be replaced by 5G. So the baseline for 5G revenue is 4G revenue. Beyond that, there is expected upside from private networks, network slicing (virtual private networks), edge computing and new enterprise connections to support internet of things use cases. 

To be sure, many wonder whether “we can charge more for 4G?” The long-term answer is not yet knowable, but the practical answer might well be “yes.” 

And that can be true even when direct tariffs for 5G are not that different, if different at all, from 4G tariffs. Some mobile operators do not charge a premium for 5G, but expect to gain market share, which drives higher 5G revenue.

Other service providers provide incentives for customers to use 5G but with a price increase coming in the form of unlimited usage. The actual driver of higher revenue per account is the shift to a higher-priced “unlimited usage” tier, not 5G as such, though such plans include 5G access at no extra charge. 

And though we have not seen it much, if at all, some mobile operators might decide to institute speed tiers for mobile service that mimic the ways access is sold on fixed networks. Customers might be offered lowest prices for lowest speeds; mid-tier pricing for mid-tier speeds and premium prices for the higher speed tiers. 

But there is another sense in which the question of “how will we make money from 5G?” can be understood.

Customers got value in terms of higher speeds when 4G was introduced. Mobile operators expected to sell more data, which would generate more revenues, and also create new services that would further increase revenues. 

But tough competition in many markets meant that mobile operators were not able to charge a price premium for 4G access. So the benefits went largely to consumers, according to ING analysts. “They got more data, better speeds and often paid less,” ING says. 

Governments also raised billions in revenue from spectrum auctions.

So one way of understanding the question about 5G revenues is the distribution of value and revenue for mobile operators within the 5G ecosystem. The downside for mobile operators is lower recurring revenues from 5G, compared to 4G. 

“Operators do not want to repeat these mistakes” seen in the transition from 3G to 4G, ING notes. But some might argue that the long-term trend will be difficult to break. 

source: Statista 

source: Strategy Analytics

source: Researchgate  

Taking market share, shifting customers to pricier accounts and increased usage charges are the immediate ways mobile operators have boosted 5G revenues over 4G levels. 

Longer-term pricing trends, though, might be difficult to change, as prices have been declining since 1996. 

On the other hand, the whole reason we see a next-generation mobile network about every 10 years, since 3G, is that capacity demand by customers keeps climbing. And while mobile operators can increase effective capacity using small cells and better radios, at some point an increase in spectrum is required. 

Also, as modulation and coding gets better with each successive generation, the cost to deliver a bit drops, allowing mobile operators to supply data consumption demand at lower costs. 

So another way to look at the payback model is to ask “what happens to your business if you do not upgrade to 5G?” Defending existing market share is a legitimate business outcome. 

Creating a more-efficient data network that supplies demand affordably also is an important business outcome. And to the extent 5G network capabilities are required to support dense internet of things networks, edge computing networks and network slicing, not investing in 5G forsakes any revenue opportunities in those areas. 

In many ways, that is akin to the value of fiber-to-home networks. In many cases, higher revenue per account is not expected. The business value instead comes from consumer market share gains, market share defense and the ability to compete in those markets. 

There is incremental value in terms of backhaul support for mobile small cell networks or business-grade services for smaller businesses. There is value in reduced operating expenses and possibly headcount. 

In other words, there are lots of ways 5G contributes to overall business value for mobile operators that go beyond direct tariff increases.

Google Now Owns Part of Airtel and Jio

Google’s new $700 million investment in Airtel, with up to $300 million to follow over five years, is part of an initiative by Airtel to reduce the cost of Android devices in the Indian market. The deal includes a 1.2 percent ownership stake in Airtel. 

But that is not the first investment Google has taken in an India mobile operator Google in 2020 invested $4.5 billion for a 7.73 percent stake in Reliance Jio Platforms. 

Separately, Facebook invested $5.7 billion in Reliance Jio Platforms in 2020. 

In part, such investments can be driven by multiple different values. Securing market entry in a key new growth area is one reason for such hyperscale app provider investments in mobile service providers. Protection from overzealous regulation is another possible benefit. 

source: Mint 

Seizing early market share leadership and user base when there are rivals is another obvious value. To the extent that hyperscalers benefit from ingesting more data, that is another value. 

Such investments in mobile and other connectivity firms are not primarily driven by the desire to replace connectivity providers in the ecosystem. 

On the other hand, it is  hard to avoid noting that two hyperscale app providers are owners of stakes in India’s largest mobile services provider, while Google now becomes a stakeholder in India’s second-largest mobile operator. 

In other cases Google has worked with mobile operators to seek ways to reduce infrastructure costs, as the Telecom Infra Project is doing. TIP seeks to  “accelerate the development and deployment of open, disaggregated, and standards-based technology solutions” that deliver high-quality connectivity. 

As a clear byproduct, TIP expects costs of infrastructure to drop. 

Keep in mind the firm and ecosystem role advantages. Looking only at the internet of things value chain, suppliers of platforms and applications depend on the connectivity function to create their business models. In other words, Facebook and Google benefit from universal, high-quality broadband. Their businesses actually require that affordable, high-quality internet access be as widespread as possible, everywhere in the world. 

source: IoT Global Network 

Instead of a value chain, think of the concept of layers as incorporated in the Open Systems Interconnection model or TCP/IP. By design, applications can run independently of the ownership of networks. The modular design means different suppliers, vendors or entities can operate at each layer, independently of ownership. 

source: Medium 

Unlike the older “closed” model of telecom, where every app on a network was either directly owned by the infrastructure owner or operated with its permission, the layers model separates each layer. 

That creates the business model we call “over the top,” where any lawful applications can be used by any person or machine without the permission of the internet access provider. 

But layers also dictate possible business models. OTT exists precisely because any lawful app can be used by any user on any network. The bundled or closed approach to creating and using applications or platforms is replaced by an open and disaggregated model.

That has profound implications. Hyperscale app or platform suppliers benefit from universal, affordable, quality internet access. Anything that increases the ability to access the internet (such as home broadband, Wi-Fi, mobility networks, satellite and fixed wireless networks) is the foundation for app provider revenue models.  

Hence their interest in ensuring that internet access is easier to deploy, everywhere, at lower costs, since lower costs mean “everyone” can use the internet. 

Conversely, the same drivers operate almost in the opposite way for connectivity providers, in some ways. The business objective of driving down internet access costs obviously limits connectivity provider gross revenues and profit margins. 

For a hyperscale or any other app or platform provider, internet access is a cost of doing business. So there is an incentive to promote lower input costs. For a connectivity provider, the access is the business, so there is an incentive to raise prices when possible. 

On the other hand, TIP, for example, aims to help lower infrastructure costs by creating open approaches to infrastructure that lead to lower costs, as functions are disaggregated and designed according to open standards any supplier can build upon. 

Investing in important, fast-growing access providers sometimes is strategic when a big new market is opening and early scale is desired. But there are other potential benefits, such as deflecting regulatory opposition or gaining mobile operator marketing push. 

That explains why Facebook and Google made their investments.

But it also is worth noting that hyperscale application and platform providers now also operate as forces to reduce infrastructure costs in ways that are helpful to connectivity providers. 

In one sense, among the changes is a shift from supplier-driven technology development to connectivity-provider led development. 

We may see other forms of connectivity role encroachment over time. At least some of that activity is a logical drive by an ecosystem participant to lower the costs of an essential business input, while increasing the revenue opportunity it can chase.

What AT&T C-Band Adds for User Experience

As a purely practical matter, this is why C-band spectrum matters for AT&T and Verizon: without more mid-band spectrum, 5G speeds cannot be increased while at the same time achieving wide coverage. 

In tests, PCMag found that AT&T’s initial tranche of C-band spectrum boosted 5G speeds 300 percent, from around 100 Mbps up to 300 Mbps. 

source: PCMag

You’ll notice something else: 4G speeds prior to C-band activation were the same as 5G. That explains why many consumers have not experienced any difference between 4G and 5G. 

But mid-band spectrum really does make a difference.