Is "Lack of Wi-Fi" the Rural Home Broadband Problem?

All observers agree that rural broadband is difficult for any number of reasons, but mostly because the cost of access network infrastructure is high when population density is low or there are physical barriers to building networks affordably. 

So it might come as a surprise that “indoor Wi-Fi” is proposed as a solution for rural broadband. Ignore for the moment that such arguments, if accepted, benefit the Wi-Fi ecosystem. The argument is seemingly curious or nonsensical: “Indoor Wi-Fi” requires internet access already be present, and that means an access network to support the private indoor signal distribution.

Arguing “”indoor Wi-Fi is a solution for rural broadband” is nonsensical unless it is preceded or accompanied by adequate internet access service and facilities. How that access is provided is not important. But “internet access” must be available or no indoor Wi-Fi is going to provide any value at all. 

In a document calling for use of indoor Wi-Fi for rural broadband, it is not clear until far into the discussion that what is proposed is not actually “indoor Wi-Fi” at all, but rather “public Wi-Fi” where the network infrastructure of a public Wi-Fi network is built and maintained by a network operator of some sort.”

In other words, a “community network” is proposed as the solution, not “indoor Wi-Fi” as such. 

The proposed solution for “indoor Wi-Fi” is actually a “public Wi-Fi” network built by some service provider that actually provides the internet access function. In other words, the solution for rural broadband “using indoor Wi-Fi” is for an internet service provider to provide service to an area so “indoor Wi-Fi” can be used

The proposed solution is actually not “indoor Wi-Fi” at all, but rather “a community network in a rural area that is built by a municipality, or a non-profit.” 

I’m sorry. This is an arguably illogical line of reasoning. The key “rural broadband problem” is lack of internet access. It does not matter what sort of network we use for that purpose. “Indoor Wi-Fi” is therefore not a solution for rural broadband, rural broadband access is that solution. 

That requires an optical fiber “backhaul” to a termination point “in a village,” for example. Only at that point can the actual “indoor Wi-Fi network be created. From that fiber termination point other point-to-point wireless extensions might be built to serve other nearby communities. 

The key point is that it is community broadband that is the solution, not indoor Wi-Fi itself. That is a signal distribution mechanism once the community broadband network already exists. 

It is what we call a tautology: a statement that is “true” by virtue of its logical form. A tautology often is known as an “argument in a circle.” Note that the truth or falsity of a tautology is meaningless. The logical arrangement of arguments cannot be proved or disproved as they only refer to each other. 

Essentially, the argument is “A is A.” That is “true" in a logical sense whether “A” is itself true or false. Rural broadband equals community broadband equals indoor Wi-Fi is the explicit argument. We might similarly argue that rural broadband equals devices equals knowledge of how to use the internet equals ability to pay. 

It’s an application of mathematical or logical reasoning (without any necessary empirical proof):  A equals B. B equals C. Therefore A equals C. 

Why not just make the argument that community broadband is the key for rural broadband? Probably because the Wireless Broadband Association is, by definition, a trade group supporting use of Wi-Fi. 

But “Rural Wi-Fi Connectivity,” as the document is titled, is not the issue. “Rural internet connectivity” is the issue. Wi-Fi plays a role, just as it does in urban areas. But the core problem is not Wi-Fi. It is the cost of internet access facilities in rural areas.

Some Trends are Universal, in Malta or Anywhere

Every “telecom” market in the world will show some version of this Malta usage trend. People have more ways to communicate these days than they used to, so voice calls and minutes of use are declining. 

 

source: Malta Communications Authority 

Mobile phones are the preferred devices and means for voice usage. 

source: Malta Communications Authority 

But for most product categories, revenue is flat or declining. 

source: Malta Communications Authority 

Casual observers might confuse the relationship between some trends, such as home broadband being a substitute product for text messaging. It would be highly unusual for any industry insider to see things that way. Most would likely say internet messaging has been the substitute for text messaging, while messaging is a substitute for voice. 

Casual observers might believe that the Covid pandemic and stay-at-home policies increased usage of messaging because of increased “on the go” activities. That is hard to square with less geographic or outside the home mobility. If anything, messaging increased in part because people were not able to go to school or work. 

Still, most usage trends seen in Malta are reflected in every market globally: higher data usage, on mobiles or fixed networks; flat or declining revenue per account and more broadband subscriptions, both mobile and fixed. 

5G Fixed Wireless Might Appeal to 20% of U.S. Home Broadband Customers

Critics are correct that 5G fixed wireless--at least in the medium term--has capacity limitations compared either to fiber-to-home or advanced hybrid fiber networks. But it also is true that the home broadband market has a value segment for whom fixed wireless seems to be in demand. And that segment might represent more than 20 percent of all home broadband customers.

According to the latest data from Leichtman Research Group, during the third quarter of 2022, some 825,000 net new home broadband accounts were added in the U.S. market. But the two major fixed wireless service providers--T-Mobile and Verizon--added 920,000 net accounts during the quarter. 

Fixed Wireless Services, Third Quarter 2022
Fixed Wireless Supplier	Total Accounts	Net Additions
T-Mobile	2,122,000	578,000
Verizon	1,063,000	342,000

source: Leichtman Research Group

Total cable industry net adds were about 39,000, while telcos collectively lost about 136,000 fixed network accounts. 

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  

Predictably, supporters and detractors offer the expected defense of advantages and weaknesses. Cable operators note the bandwidth limitations. Verizon and T-Mobile point to the ease of installing and price advantages. In some cases fixed wireless might actually be faster than the other alternatives available from other local home broadband providers. 

Critics do correctly note that fixed wireless home broadband is carefully marketed in areas where new 5G networks have spare capacity. That capacity will disappear as 5G adoption increases, the critics say.

But Verizon and T-Mobile might argue they have ways to boost capacity over time, as 5G networks are used more heavily and as bandwidth demand keeps increasing. Higher-capacity millimeter wave spectrum is the obvious early answer. 

Longer term, Verizon and T-Mobile are likely to explore ways to add fiber to home coverage as well. For Verizon, that means finding new says to secure FTTH capacity outside its historic fixed network footprint. For T-Mobile, that means getting into FTTH for the first time. 

Up to this point, T-Mobile has been focused on areas where there is less competition, such as rural markets. 

Verizon’s geography is the roughly 80 percent of U.S. homes outside Verizon’s fixed network service territory, as well as its own mobile customer base, who are encouraged to bundle fixed wireless with existing mobile service. 

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. 

Verizon fixed wireless service plans also suggest that existing Verizon mobile customers are key targets. In the meantime, there is 4G fixed wireless, which will have to be aimed at a lower-speed portion of the market, albeit at about the same price points as 5G fixed wireless. 

Up to this point, Verizon 4G fixed wireless, available in some rural areas, offers speeds between 25 Mbps and 50 Mbps. That might appeal to consumers unable to buy a comparable fixed network service. 

By some estimates, U.S. home broadband generates $60 billion to more than $130 billion in annual revenues. 

If 5G fixed wireless accounts and revenue grow as fast as some envision, $14 billion to $24 billion in fixed wireless home broadband revenue would be created in 2025. 

5G Fixed Wireless Forecast
	2019	2020	2021	2022	2023	2024	2025
Revenue $ M @99% growth rate	389	774	1540	3066	6100	12,140	24,158
Revenue $ M @ 16% growth rate	1.16	451	898	1787	3556	7077	14,082
source: IP Carrier estimate

If the market is valued at $60 billion in 2021 and grows at four percent annually, then home broadband revenue could reach $73 billion by 2026.

		2022	2023	2024	2025	2026
Home Broadband Revenue $B	60	62	65	67	70	73
Growth Rate 4%
Higher Revenue $B	110	114	119	124	129	134
source: IP Carrier estimate

If we use the higher revenue base and the lower growth rate, then 5G fixed wireless might represent about 10 percent of the installed base, which will seem more reasonable to many observers. 

Assuming $50 per month in revenue, with no price increases at all by 2026, 5G fixed wireless still would amount to about $10.6 billion in annual revenue by 2026 or so. That would have 5G fixed wireless representing about 14 percent of home broadband revenue, assuming a total 2026 market of $73 billion.

If the home broadband market were $134 billion in 2026, then 5G fixed wireless would represent about eight percent of home broadband revenue. 

Fixed wireless might be even more important elsewhere in global markets.  

The point is that the near-term market is substantial for both T-Mobile and Verizon in “out of region” geographies. For T-Mobile that is 100 percent of U.S. homes. For Verizon that is about 80 percent of U.S. homes.

Will Digital Infra Asset Shifts Change?

Higher interest rates affect most parts of any economy. What we will have to see is the impact on digital infrastructure ownership in the near term. If interest rates climb to five percent or more, it is going to affect the payback model for taking digital infra (towers, data centers, distribution networks) private.

Low interest rates have meant cheap borrowing costs. All that is going in reverse now, as monetary policy is shifting to higher rates to halt inflation. Higher borrowing costs should slow dealmaking, as payback models get worse. 

source: Bain 

On the other hand, if inflation remains high there are other risks, including severe recession, which likewise would affect deal flow. On the other hand, severe recessions also create buying opportunities for firms with available capital, able to snap up distressed properties. 

So the digital infrastructure investing boom will face new challenges over the next several years, some negative, some perhaps positive. Continued high inflation will mean continued rate increases, a negative. On the other hand, high inflation also can boost asset values, a possible positive. 

Stagflation and recession should slow dealmaking while putting pressure on price multiples. Again, some negative and some positive effects will occur. 

Still, a clear impact might be that the wave of private equity purchases of formerly public infrastructure from service providers would slow, as interest rates rise. 

How much slower is the issue, and for how long. Observers do not expect five-percent (or higher) interest rates for the long term, but activity will hinge on the level of rates and their duration. 

In fact, the whole digital infra privatization business has been fueled by near-zero “real” interest rates. Inflation rates also matter, as they affect “real” interest rates. For the whole class of “alternative” infrastructure (power utilities, roads, airports, oil and gas, renewable energy and data centers, towers and fiber infrastructure), expected returns have been dropping, and specific returns for digital infra might arguably be closer to five percent than 10 percent. 

source: McKinsey 

But that is why five-percent interest rates slow activity. If the expected return is five percent, borrowing costs are five percent and inflation rates are high, investments no longer make sense. 

The point is that it would not be unexpected to see a slowdown in digital infra privatizations for a while. The business case--with higher interest rates--does get worse.

5G is Faster, and That Should Not be Surprising

This is what 5G is supposed to provide, and eventually will, even in markets where the supply of mid-band spectrum has been limited. Every next-generation mobile network has brought an order of magnitude (10 times) increase in downstream speeds, and about the same improvement in latency performance. 

source: Opensignal 

As always is the case, any network with light loading will operate faster. Once lots of users get added, performance will slow until capacity improvements are made, such as adding smaller cells to more intensively reuse available spectrum assets. 

What is Your Core Competency?

Vodafone is not the first, nor will it be the last mobile operator to conclude that full ownership of tower assets is no longer a necessity. In fact, mobile operators have reached that same conclusion for a decade or more, spinning out tower assets to raise cash for other purposes such as debt reduction or capital investment in spectrum and other capital projects, or to fund fiber-to-home infrastructure. 

But a similar reevaluation of core assets seems to be underway on a broader level. Some mobile operators question the financial return from 5G, even as they realize they have no choice but to participate. In some cases, such as Malaysia, the solution has been to switch to a single national wholesale network, where the prevailing practice has been for each major mobile operator to build and own its own infra. 

In the fixed networks business, some nations have switched to a wholesale approach as well, where all retail providers can use one underlying network. 

In other cases regulators have encouraged partial facilities ownership by allowing unbundled access to different parts of access networks, for example. 

The larger point is that access service providers--mobile or fixed--now are being forced to confront core elements of their business models, at least on the cost side. Inevitably, that involves decisions about where value lies, where core competence and the ability to create value lies. 

Already, we can see that the answers might be shocking. As it turns out, building, owning or operating complex networks is not a core competency. If that were true, wholesale would not be embraced. Sale of towers would not happen. 

In the same way, ownership of computing hardware or platforms used to run the network would not be considered something a firm can outsource to a public cloud. Open source likely would not be an increasingly popular approach to network elements. 

In fact, over time, even larger facilities-based competitors have begun to move in greater ways towards a mobile virtual network operator model for retail operations. They might prefer to say ” “asset light,”  but the principle is the same. 

Since the whole purpose of competition policy is to create supplier incentives to improve product quality and quantity while reducing retail prices, we might as well recognize that lower costs in the core access business are somewhat inevitable. 

A competition policy that leads to higher prices, reduced quality and quantity would be deemed a failure. 

All that leads to constant pressure on firm leaders to seek new ways of reducing capital investment and operating costs. And many advocate an “asset light” approach that reduces the need to invest in physical networks. 

McKinsey 

One might say this is akin to the “fabless” approach to the microchip businesses, where an entity designs a chipset, but then outsources its manufacturing to a third party. In that analogy, high value is earned by embedded intellectual property. 

But all that does raise the question: what are a service provider’s core competencies? Where is unique value to be found? Those are the things that arguably cannot be outsourced.

Betting on Spectrum

Charlie Ergen, Dish chairman, always has believed that spectrum has business value, and should be acquired whenever possible, even if his firm had no immediate way to monetize it, and even when nobody is quite sure how monetization would happen. Many observers over the decades have quipped that “even Charlie” might not always have a clear view of the end game. 

Many observers, for example, were of the opinion that Ergen would simply sell his spectrum, and not actually build and operate a 5G network. Many could argue some version of that still will happen; that Ergen will sell the whole 5G business at some point. 

That would not be unexpected for an entrepreneur that has successfully made one or two business transitions already--from satellite dishes to direct broadcast satellite; from DBS to video streaming--and is setting up the mobile communications business as the successor to DBS and streaming. 

The point is that though many other established businesses appreciate spectrum when it already is fundamental to their businesses, not so many actually value spectrum in advance of having an immediate purpose in mind.  

Throughout, Egen has acted boldly, always on the assumption that spectrum has value, even when a clear path to putting that spectrum to immediate revenue-generating use is not clear. 

But Ergen is a gambler and a disrupter, many would say, nearly always cash strapped and without a clear path to investing what would be required to monetize the spectrum assets. 

Dish’s current 5G network, for example, might be said to represent the minimum necessary to avoid losing its spectrum licenses. Coverage is far from “nationwide” while handset selection is quite limited. So limited, in fact, as to suggest Dish is not yet ready to compete head to head with the other three big national providers. 

source: Dish, InsideTowers 

Indeed, at this point, the value of Dish spectrum almost certainly is greater than the value of Dish’s operating businesses, as the satellite video business is shrinking and the 5G network is not yet available widely, with the other attributes (handset selection, among other things) that make a national mobile network attractive to potential customers. 

Dish holds around 150 MHz of sub-6 GHz spectrum (low-band and mid-band)--valued for its coverage capabilities, not capacity--compared to Verizon and AT&T, which own around 290 MHz each. 

But remember the strategic value of acquiring an operating company for the value of its spectrum licenses, as T-Mobile did with its Sprint acquisition, boosting T-Mobile’s trove of mid-band spectrum suitable for 5G use. 

By Federal Communications Commission rules, the other incumbent service providers could not buy Dish’s spectrum assets before 2026.

Ergen is not the only entrepreneur who has viewed spectrum as a way to build a new business. But he is among the view that have been able to realize that vision, even if the final story has not been told. Consider the bankruptcies of first-generation low earth orbit satellite constellations. 

Two decades later we see multiple burgeoning LEO constellations. One might already note that demand is likely exceeded by supply, so consolidation or failure loom in the future. 

The point, though, is that visions of what can be done with spectrum sometimes do not materialize. Sometimes a few decades must pass before everything lines up. In other cases visions are faulty. 

But few business leaders other than Charlie Ergen have had such continual belief that spectrum has value and should be acquired whenever possible.