New Era of Abundance Approaches: Consumer Bandwidth 1 Gbps to 10 Gbps

In one sense, Google Fiber was a breakthrough, offering a symmetrical gigabit service for $70 a month. But scale matters in telecom.

So, in a flash, and despite all skepticism, the U.S. high speed Internet access business is about to enter a period of abundance.

Comcast is upgrading virtually its entire customer base–21 million homes–to gigabit speeds by the end of 2015, with 18 million homes able to buy service at 2 Gbps, also by the end of 2015. That is 21 million U.S. homes.

So a relative trickle of neighborhood level investments now will be massively disrupted, in one move, by the biggest supplier of high speed access in the United States.

Other Internet service providers will have to respond, even if they elect to upgrade at lower levels. But that is not all.

Consider what already is envisioned for fifth generation mobile networks:

  • bandwidth of up to 10 Gbps per device or per user

  • latency of one millisecond

  • seamless ability to use any available access network

  • bandwidth 1,000 times greater than 4G

Some might gasp at predictions the coming fifth generation mobile network standard (5G) will feature bandwidths up to 1,000 times greater than today’s mobile networks.

But that three orders of magnitude leap–by perhaps 2020–is coming. And consider the irony: if 2 Gbps is the fixed network standard, for the first time ever, mobile network bandwidth will be five times greater.

That has never happened before. As many forecasts for fixed network bandwidth suggest a very widespread gigabit capability is coming, use of millimeter frequencies and small cell architectures will underpin the 5G 10 Gbps standard.

Even if the first versions of 5G routinely deliver only a gigabit, the implications are quite substantial. For the first time, mobile Internet access headline speeds will equal fixed network speeds.

So one big implication is that bandwidth abundance is coming. Even if no present user requires a gigabit, local access bandwidth will cease to be a constraint for Internet experiences.

That era of abundance also will reveal new bottlenecks, however.

In fact, latency is going to leap to the top of problems affecting end user experience.

That means we will be turning attention back towards the edge of the network, as that is one way to reduce the latency of cloud-based services.

But the key change, in 2015, is that Internet access abundance is going to become a reality shortly, with all sorts of expected, and likely unexpected, implications for everyone in the ecosystem.

Some platforms will be unable to keep up. One thinks of satellite and fixed wireless, for example.

Mobile access will become a full substitute for fixed access for the first time.

The end user estimation of price-value relationships is going to evolve. Price per bit is going to plummet.

Internet service provider profit margins will be under pressure. App providers will not have to worry about bandwidth constraints.

Nokia Networks has shown the ability to transmit mobile signals at 10 Gbps peak rates over the air at 73 GHz using Nokia mmWave gear at the Brooklyn 5G Summit, jointly organized by Nokia Networks and NYU.

NTT Docomo and Nokia Networks earlier had shown the ability to transmit at 2 Gbps rates in the 70 GHZ band, using Nokia Networks mmWave technology, in an indoor setting.

“Utilizing higher frequency bands including millimeter wave is key to deliver extremely high performance in 5G,” said Seizo Onoe, NTT DOCOMO CTO. “We believe that high-frequency spectrum shall be used not just for small cells as a means to complement the existing network, but also for building solid area coverage through coordination with existing lower frequency bands.”

Of all the potential changes, the equivalence of mobile and fixed access, in terms of headline speed, will be most significant, early on.

As mobile became a full equivalent of fixed voice service, with the added benefit of mobility and text messaging, so it is conceivable that the entire value proposition for fixed networks could be devalued.

A business with lots of business challenges could become even more challenged, in that respect. A change in primary value is likely to occur, as a result. Fixed access will evolve to support the applications where it has an advantage, such as bulk data backhaul, support for small cells or heavy linear video consumption.

Abundance often creates many new advantages and problems. So it will be for ISPs, cable companies, telcos, satellite and fixed wireless providers.

What are Implications of 1,000 Times More Bandwidth?

It can be argued that Microsoft, Netflix and Google have built their business success on an understanding of Moore’s Law. For Microsoft, the insight might have been that if Moore’s Law made hardware cheap, what would a software business look like?

For Netflix, the insight might have been that if Moore’s Law applied to bandwidth services, it would be possible to launch a streaming service that was sustainable.

For Google, an understanding of Moore’s Law might have meant it could create the world’s first big ad-supported technology business.

Communications service providers have seen the impact of Moore’s Law as well. The business impact of voice over IP and instant messaging has already been felt.

The revenue impact of changes in the video subscriptions business is about to hit.

Well aware of how Moore’s Law operates, service providers likely are about to see yet another wave of Moore’s Law-induced change of business context.

Consider what already is envisioned for fifth generation mobile networks:

  • bandwidth of up to 10 Gbps per device or per user

  • latency of one millisecond

  • seamless ability to use any available access network

  • bandwidth 1,000 times greater than 4G

In the fixed network business, something similar is happening.

Comcast plans to offer 2 Gbps symmetrical Internet access to perhaps 18 million homes out of 21 million.

Some might gasp at predictions the coming fifth generation mobile network standard (5G) will feature bandwidths up to 1,000 times greater than today’s mobile networks. That three orders of magnitude leap–in perhaps five years–is breathtaking. It implies potential bandwidth of 10 Gbps.

Similar breaktaking leaps are happening in the fixed network as well.

Though it seems almost laughable that fixed network bandwidth could grow at rates close to that of Moore’s Law, that seems undeniably to be happening.

Comcast in May 2015 will introduce Gigabit Pro, a new 2-Gbps symmetrical residential Internet access service in  Atlanta, with an expected introduction in additional Comcast markets nationwide.

Comcast currently expects the service to be available to about 18 million homes by the end of 2015.

That service is not likely to be purchased by many consumers. The Comcast 500-Mbps service now costs about $400 a month, so there is no telling what the price for 2-Gbps might be.

The larger point is that, based simply on historical precedent, widely-available gigabit speeds (which is likely going to be different than the speeds most consumer choose to buy) should be available in the U.S. market by about 2016.

source: CableLabs estimate

The implications potentially are far reaching. At the broadest level, consider what is happening as cable TV operators now make more money from “dumb pipe” Internet access than the legacy video subscription business.

Likewise, by 2013, U.S. telcos had lost more than 60 percent of the voice lines they sold in 2000. In fact, voice revenue has become a small part of overall revenues, which are lead by Internet access, business services and mobile.

In fact, a  U.K. survey found that 33 percent of mobile phone users claim they do not use voice at all.

“Voice” or “making phone calls” were not on a list of the top 10 most-used mobile phone features in a recent poll of 1,000 people in the United Kingdom, conducted by Oxygen8.

With diminishing voice, messaging and soon video “application” revenues, telcos will  make most of their revenue from “dumb pipe” Internet access.

That explains the feverish search for new revenues related to connected cars, Internet of Things or machine-to-machine services.

Mobile payments, carrier VoIP, carrier instant messaging, advertising, data centers, hosting and software as a service have not proven to be sizable or transformative new revenue sources for telcos. At least, not yet.

Even assuming big new application revenues are discovered and commercialized, the dominance of “dumb pipe” high speed access is hard to ignore.

Beyond that, the climb to gigabit speeds will pose operating cost and capital investment challenges. In any scenario, high speed access will continue to be the single biggest revenue source for any telco or cable TV company. It is likely relatively soon to become the single biggest revenue source for most mobile service providers as well.

And if you thought mobile substitution has been a problem, it could get worse.

Even in the U.S. market, mobile Internet access already is  a viable substitute for fixed Internet access.

About seven percent of U.S. residents own a smartphone but do not buy fixed network high speed access service at home, and therefore rely on their smartphones for access. That data point provides some evidence about consumer ability to substitute mobile access for fixed Internet access.

About 15 percent report they have a limited number of ways to get access to the Internet aside from using their phones, according to a study conducted by the Pew Research Center.

The point is that telecom executives will have to redouble thinking about what their businesses must look like as Moore’s Law continues to operate. To a greater extent than many realize, big thinking is necessary.

If one argues Microsoft assumed computing cycles would be nearly free; Netflix concluded bandwidth would be nearly free and Google decided all computing and bandwidth would be nearly costless, so too telecom executives have to grapple with what that implies for their own businesses.

The simple choice–be the low cost bandwidth provider or a supplier of valuable applications–is false. Telcos will have to be providers of low-cost bandwidth AND providers of valuable apps. No other approach will generate sustainable revenues and profit margins.

But an understanding of the business impact of Moore’s Law is essential.

U.S. Mobile Market Remains Unstable, No Chance of Stabilization Yet

Is the U.S. mobile market anywhere close to stable? Almost certainly not.

T-Mobile US unveiled a new set of initiatives aimed at attracting business customers, and an expanded program to take consumer share from other U.S. mobile carriers, as part of its Uncarrier 9.0 announcement.

Where T-Mobile US had been offering to pay early termination fees for customers who switched, T-Mobile US also now is offering to pay off any remaining phone payments owed as part of device installment payment plans.

Sprint earlier this month launched new programs to encourage switching as well, moving before T-Mobile US to offer reimbursement of early termination fees and remaining payments for device installment plans.

All of that is only the latest examples of profit margin compression in the telecom business, earlier seen in the long haul capacity and long distance voice segments of the business.

With some observers wondering how long the U.S. price and promotion war might moderate, or end, the answer seems to be “not yet,” even if no price war lasts forever.

Under other circumstances, a reasonable expectation might be that we face at least another year of unusual efforts at price disruption, to be followed by a period when the leading contestants have adjusted enough to show they can weather the attack, and the attacker or attackers find they have gained share, but now have to switch to improving profits.

The reason is that, at some point, firms find they must concentrate on profits, and have to scale back profit-losing efforts to add customers and gain market share.

So under other circumstances, one might argue the price war will last as long as T-Mobile US and Sprint believe they can continue to add net new customers every quarter, gaining market share, while tolerating margin compression.

Under other circumstances, another likely predictor of stability is a shift in market structure with a clear number one, a number two that has no easy way to displace the top provider, and a number three provider large enough to sustain itself in that position, with the number four supplier far behind the other three.

The reason for that prediction is that, In a classic oligopolistic market, stability occurs when the market structure features a pattern featuring a top supplier with about 40 percent share; a number two supplier with about 30 percent share and a third supplier with about 15 percent.

We are not too far from that pattern, in one respect.

In terms of revenue share, Verizon in early 2015 has about 39 percent share, while AT&T had 33 percent.

One might argue both Verizon and AT&T will lose much incentive to engage in promotional behavior when AT&T no longer believes it can catch Verizon, and the number three contestant no longer really believes it can catch number two, for example.

The number-three supplier, in terms of revenue, is Sprint, at about 15 percent revenue share. It is almost precisely where one would predict the number-three supplier would be.

The issue is that T-Mobile US has about 12 percent share, and is fighting to grow.

Of late, T-Mobile has been rapidly gaining share, with the intention of supplanting Sprint at the number three position.

The problem is that U.S regulators seem unwilling to allow an acquisition of T-Mobile US by Verizon, AT&T or Sprint. That means only a new contestant could do so. And that means the classic oligopoly structure cannot form.

Among the variables are Dish Network’s need to enter the market or sell its spectrum; Comcast’s expected entry and then any future moves by a large Internet player (Google, Apple or another firm). The point is that the U.S mobile market does not presently resemble a stable oligopoly market, not do the medium term competitive prospects suggest the market will assume such a form.

That means, no matter how long the immediate marketing war lasts, the market will remain unstable, unable to assume a stable market share structure.

Strategically, Comcast is expected to enter the market, at some point.

Dish Network also either must enter the market as an operator, or forfeit the rights to spectrum that presently accounts for as much as 80 percent of its total market value.

And then there are the other contenders, including Google, which it is believed soon will be entering the mobile market, and Apple, a perennial potential actor in the market as well.

Regarding Dish Network’s possible moves, none would seem to reduce the leading suppliers from four to three, which would allow a stable structure to emerge.

Even if Dish simply sells its spectrum (and if regulators allow it to sell to Verizon or AT&T, something that is questionable), there is no net change in the number of suppliers.

In fact, Dish Network might yet actually move ahead and become a service provider, adding one more contestant.

Were Dish to become a wholesale capacity supplier, the number of retail suppliers would not be reduced.

And most observers believe Comcast will enter the market within a couple of years, at the very least. And then there are the “wild card” scenarios, where a firm such as Google or Apple decides to enter the business–either by acquiring one of the top four suppliers or by creating a new retail venture.

The point, one might note, is that no stable structure can emerge until the top three market share spots represent 85 percent market share, with a generalized 40-30-15 pattern.

It is hard to see that happening any time soon. For that reason, the U.S. mobile market is likely to remain unstable, with margin compression a continuing reality.

Unexpected Net Neutrality Consequences

Unintended consequences are a constant reality for any specific piece of legislation, or any specific rule making. So it will be with network neutrality.

“Managed services,” or “specialized services” (think carrier voice,  linear video subscriptions or text messaging) now might emerge as a key development for service providers, should network neutrality rules become more popular, or survive legal challenge. The reason is that such services are exempted from the rules.

Oddly enough, the argument that network neutrality is needed so the “Internet doesn’t become cable TV” will have the perhaps-unintended consequence of increasing the value of such managed services for Internet service providers.

In other words, it is likely a rational Internet service provider, with the requisite scale, can make higher profit margins on a managed service than from commodity high speed access.

It therefore makes sense that rational actors will shift effort towards managed services.

Consider that, from 2010 to 2013, U.S. mobile data pricing (per unit sold) declined by only single digits year over year. In the first nine months of 2014, data pricing dropped by 77 percent, according to industry analyst Chetan Sharma.

Whatever profit margins might once have been, one can argue those margins are dropping, even if suppliers are selling more units.

Average (mean) mobile data consumption increasedto about 2 Gb a month in 2014. That single-year increase is unusual. Sharma notes it took 20 years for consumption to reach 1 Gb per month usage levels.

In addition to plunging prices (less revenue per unit sold) and higher usage (more network cost), marketing costs have grown as competition has become more intense.

Overall U.S. operating expense rose 20 percent, year over year. Income was flat while earnings grew three percent.

That is likely to convince larger ISPs to create new products where bandwidth is simply an enabler of a service, and not the actual product sold to an end user. Linear video services and carrier voice services or text messaging require bandwidth and network services, but the product purchased by the customer is not “bandwidth.”

Ironically, March 1 to 7, 2015 is “National Consumer Protection Week” in the United States, a time when the Federal Trade Commission and 89 partners including nonprofit groups, businesses, and federal, state and local government agencies across the country will spotlight their efforts to protect consumers.

The irony comes because new Federal Communication Commission rules on network neutrality, regulating Internet access as a common carrier service will have the effect of ending the FTC’s ability to apply consumer protection rules to Internet access services.

“We do not have authority over common carriers,” said FTC Commissioner Maureen Ohlhausen. “There are significant issues about our ability to protect consumers under Title II.”

In the past, “to the extent network neutrality is an issue, the FTC has been able to address them,” said Ohlhausen. “We are consumer protection enforcers; we can do that.”

The FTC recently took action against a mobile service provider advertising “unlimited access” that actually throttled users of the plan, after a certain threshold of usage was reached, for example.

Under Title II, the FTC is barred from acting, however.

That is likely only the first “unintended consequence” that will surface once the 332-page document is formally released. The FCC has argued the new rules will not lead to rate regulation.

FCC Commissioner Ajit Pai does not agree. “For the first time, the FCC will regulate the rates that Internet service providers may charge and will set a price of zero for certain commercial agreements.”

Of course, much hinges on whether the new rule survives legal challenge, and whether Congress acts to restore a Title I framework.

Unintended consequences are highly likely.

AT&T Transformation Means More Market Competition is Coming

Diversification is a time-tested way for suppliers, investors or buyers to reduce business risk. Diversification also now is a major growth strategy for most service providers.

Consider the significant ways AT&T is about to change, assuming the acquisitions of DirecTV, Iusacell and Nextel Mexico are approved.

Facing huge competition in the U.S. mobile market, AT&T reduces its reliance on U.S. mobile revenues.

In the face of mounting pressure in the U.S. consumer markets, AT&T would–arguably for the first time ever–become a company whose revenues are lead by business customers and services.

Also, AT&T would reduce exposure to declining voice revenue and increase the scale of its video entertainment business, a product segment where telcos are gaining share, rather than losing share.

Where today U.S. mobile operations are the single biggest revenue generator, after the transactions AT&T consumer mobility will be only the third-biggest revenue contributor.

“Our transactions with DIRECTV and Mexican wireless companies Iusacell and Nextel Mexico will make us a very different company, said AT&T CEO, Randall Stephenson. “After we close DIRECTV, our largest revenue stream will come from business-related accounts , followed by U.S. TV and broadband, U.S. consumer mobility and then international mobility and TV.”

Consider the magnitude of the changes. In 2014, AT&T reported earning nearly 60 percent of total revenue from mobile services. AT&T meanwhile earned about a quarter of its revenue from business customers.

Consumer landline revenue was less than 20 percent of total.

Assuming AT&T’s acquisitions of Iusacell, Nextel Mexico and DirecTV are approved, AT&T will earn about 45 percent of total revenue from business customers and about 20 percent from consumer mobility services.

About 30 percent of revenue would be earned from U.S. consumer high speed access and video entertainment.

All of that has key implications. AT&T will reduce reliance on U.S. market revenues. From this point forward, AT&T growth arguably will come from geographic expansion outside the U.S. market.

At the same time, AT&T will reduce its exposure to highly-volatile U.S. consumer fixed line and mobile markets, while increasing the weight of the higher-margin, higher gross revenue business markets.

Video entertainment becomes a much-bigger portion of total revenue. In fact, high speed access plus TV will the second-biggest revenue contributor.

So think about the possible implications. Where will AT&T be willing to invest more, and where will it make sense to invest less? How hard will AT&T fight to protect particular lines of business?

What products will be easier to “merchandise” because profit margins are low, and which will have higher profit margins?

As one might have argued that AT&T has had less and less incentive to invest in its fixed network, given the growth of its mobile services, so now AT&T might have even less long term incentive to invest in the consumer portions of its U.S. fixed network.

That might create new opportunities for domestic competitors, as AT&T and Verizon see the need to “strategically disinvest” in fixed assets, in favor of mobile assets. In AT&T’s case, there now also is the necessity of investing in assets outside the United States.

In other words, AT&T will have diversified its revenue sources towards business, toward video and towards international segments, and conversely away from consumer and domestic.

So some U.S. Internet service providers and some mobile operators might find AT&T more vulnerable in parts of its consumer services portfolio.

At the same time, AT&T might be more inclined to allow competitors to take consumer market share, especially at the low end, since AT&T will be more focused on global and business revenue sources.

AT&T’s moves are part of a diversification pattern happening elsewhere, and for obvious reasons.

“Overall, growth in telecom revenue continues to slow in every geographic region,” according to Stéphane Téral, Infonetics Research principal analyst. That puts a premium on discovery of brand new revenue sources, geographic expansion and product line expansion.

Europe’s five largest service providers—Deutsche Telekom, Orange, Telecom Italia, Telefónica, and Vodafone—continue to experience declining revenue, though less pronounced than in the past three years, he noted.

Global mobile service revenue barely budged in the first half of 2014, up just 0.5 percent from the same period a year ago, Infonetics says.

But mobile data services (text messaging and mobile broadband) rose in every region in the first half, driven by the increasing usage of smartphones. The obvious corollary is that voice revenues have fallen nearly as much as mobile data revenues have grown.

Mobile broadband services grew 26 percent year-over-year, enough to offset the decline of text message revenue declines, Infonetics reported. On the other hand, that sometimes was not enough to offset losses of voice revenue.

In Latin America, mobile data will not replace lost voice revenues. Orange voice revenue declined 3.3 percent in 2014. In Japan, DoCoMo says a change in voice tariffs might mean NTT does not make money on voice until 2017.

High speed access revenue still drives growth in mobile and fixed line segments, but revenue will “begin to stabilize” between 2015 and 2016, if “our competitors behave, said Ramon Fernandez, Orange CFO.

Vodafone now is focusing on fixed network broadband for revenue growth, as its mobile business is declining.

The larger point is that diversification moves are going to continue, allowing many service providers to recast themselves.

At the same time, that is going to create new space for competitors to enter markets where leaders are less likely to put up as stiff a fight as they might have in the past.

Ironically, as competition grows in US. consumer services, at least some major contestants, including AT&T, are essentially redeploying effort and capital away from the fight.

That means market share shifts are going to accelerate in U.S. consumer markets.