Business Case for Much More Fiber Remains a Challenge

Verizon’s decision to deploy NG-PON2 networks, AT&T and Verizon fixed wireless plans and use of unlicensed spectrum, plus spectrum sharing, are among the ways various internet access providers are working to improve the economics of next generation fixed networks.

As always, competition and the business model are key constraints.

Policymakers and regulators always have to balance competition and investment incentives in the communications business. Too much perceived competition lowers profits, and inhibits investment; but lack of competition tends to inhibit consumer-facing innovation.

At the moment, incentives are a key problem where it comes to next generation fixed network investment.

If consultants at Deloitte are correct, and as much as $130 billion to $150 billion in additional optical fiber investment is needed in the U.S. market, under conditions where financial incentives do not exist, something will have to give.

As Deloitte sees matters, at the moment, U.S. service providers do not have incentives high enough to support that level of deployment of new facilities. For starters, some major suppliers--including both cable TV and telcos--have high stranded assets.

If you assume a typical cable operator has revenue generated by roughly 60 percent of its passed consumer locations, while at telco gets revenue from about 40 percent of residential locations, stranded assets range from about 40 percent to 60 percent of the invested distribution network.  

That obviously creates a return on invested capital problem. Unless something changes, in terms of revenue upside, many of the largest internet service providers will have a hard time vastly increasing their optical network investment.

source: Deloitte

source: Deloitte

NG-PON2 Explains Verizon's New Trunking and Access Architecture

Not since its decision to deploy fiber to the home for consumers, replacing its twisted-pair copper access media, has any single decision made by Verizon Communications likely been as consequential as its decision to deploy NG-PON2 networks using time and wavelength division multiplexing.

Bandwidth, by itself, is not the consequential implication, although NG-PON2 supports as much as 10 Gbps per account or location, and 40 Gbps per wavelength.

The big implication is the ability to logically separate wavelengths on a single optical fiber, and then dedicate wavelengths to end user accounts. Also, separate wavelengths can be used to deliver different services to different users (or support different applications) at a single location.

In principle, wavelengths also could be assigned to wholesale customers and can reuse existing optical fiber running GPON, which Verizon does, for the most part.

“Technologies such as NG-PON2 present exciting new opportunities for vendors, such as delivering residential and business services on multiple wavelengths over the same fiber,” said Vincent O’Byrne, Verizon director of technology.

In essence, NG-PON2 logically separates delivered bandwidth from physical media, to an extent. NG-PON2 also physically separates discrete wavelengths from each other, allowing discrete wavelengths to carry different services, with varying degrees of symmetry (upstream/downstream) and capacity.

In essence, what Verizon hopes to do is create a single physical trunking network that can support services for virtually any application or use case by using discrete wavelengths, and reusing much of the existing PON infrastructure.

What clearly is different now is a new set of applications beyond the fiber to home apps GPON was designed to support. The new use cases include fiber to the building for multiple-dwelling units, enterprise networking, mobile backhaul and fronthaul, as well as cloud-based radio access networks.

Supporters also believe operating costs will be as much as 30 percent lower than other alternatives, in part because expansion can be done incrementally, reusing passive investments to a large degree, and featuring relatively-modest upgrades of active components.

Those NG-PON2 features are behind Verizon’s new thinking on optical fiber deployment to support small cells, enterprise and consumer bandwidth requirements. One way of noting the change is to say Verizon hopes it no longer will build separate trunking networks for enterprise, mobile networks and residential and small business customers.

Instead, it hopes to deploy a single physical infrastructure, and then use separate wavelengths to deliver services (mobile backhaul, enterprise, small or medium business, consumer use cases).

NG-PON2 capabilities also are the reason Altice has decided to scrap the hybrid fiber coax access platform, alone among U.S. cable operators.

Researchers at CIR say $2 billion a year will be spend on 5G trunking infrastructure through 2022, with half the annual total spent in the United States.

Chinese service providers will spend more than $130 million on 5G backhaul in 2022. China will end up being the fastest-growing market for backhaul, CIR calculated, followed by South Korea.

“The technology that will dominate 5G backhaul will be NG-PON2,” CIR analysts predict. “By 2022, more than $890 million will be spent on this technology for 5G backhaul."

source: Nokia

The time and wave division multiplexing allows for higher bandwidth (up to 10 Gbps for any user with a total of 40 Gbps, going to 80 Gbps later) and optimal flexibility relative to bandwidth per user, fiber management, service convergence and resource sharing.

But capital expense also is expected to be 30 percent lower, with less operational complexity than dense wave division multiplexing, as well.

TWDM-PON offers up to four wavelength pairs (eight in the future) that can each be configured at different bitrates (10G/10G, 10G/2.5G, 2.5G/2.5G) to best address the specific requirements of residential, business, or backhaul services. Providing up to 10-Gbps symmetrical speeds on each wavelength.

The bottom line is that Verizon, and likely Altice, will be making the most-important change in distribution and access network design in decades.

IoT Growing Fast in Transportation; Oil and Gas, Survey Finds

A new survey of manufacturing; oil and gas as well as transportation industry executives suggests internet of things adoption has been especially rapid in the transportation and oil and gas industries.

The internet of things is not actually new in the manufacturing industry. Industrial and transportation firms in 2017 already support more than three billion devices. About 87 percent of respondents to a survey sponsored by BSquare report already using the internet of things.

Of particular importance for mobile service providers are the transportation use cases. Some 93 percent of transportation industry executives reported having an IoT application in use. In substantial part, that is because industry regulations now require emissions and electronic logging reports.

A few use cases are widespread, including device connectivity and simple data forwarding, in use by 88 percent of respondents. Some 66 percent say real-time dashboards and monitored activity are in use. Advanced analytics, such as machine learning, cluster analysis, and artificial intelligence, from data scientists are used by half of respondents.

Fully 63 percent of respondents in the transportation industry say they implemented an IIoT application within the last year. Likewise, some 66 percent of oil and gas industry say they have implemented IIoT within the past year.

Only about 33 percent of manufacturing industry respondents said they had implemented within the past year.

Other business problems IoT is expected to assist with include vehicle performance, cited as an objective by 95 percent of respondents; logistics use cases, cited by 65 percent of respondents and lower operating costs, an objective for 23 percent of respondents.

“Gaining better visibility into and control over business-critical equipment” is a top objective for respondents. More than 90 percent of adopters say device health was a driver for industrial internet of things adoption, including real-time device information, better device management, and device optimization.

Some 67 percent said logistics was an objective, operating cost reduction (24 percent) and increased production volume and better compliance (18 percent) also being desired outcomes.

As you would guess, some 78 percent of respondents of decision-makers and influencers in the manufacturing, oil and gas, and transportation industries report using internet of things in the sense of devices connected and sending data to controllers and servers.

About 56 percent say they use IoT for real-time dashboards and monitoring. Some 46 percent use machine learning, cluster analysis, artificial intelligence or advanced analytics.

Connected devices in the industrial segment are predicted to grow to more than 7.5 billion by 2020.

source: bsquare

How Much Revenue Boost from Gigabit or Multi-Gigabit Internet Access in Consumer Market?

Singapore is among few internet access markets where a statement such as “the jump from 500 Mbps to 1 Gbps really is not that great” actually can be made. In most fixed internet access markets, and for most potential customers, the option is not yet available.

That noted, in markets where gigabit internet access is widely available, the pricing premium for a gigabit service--compared to a 500-Mbps service--ranges from between 16 percent to 40 percent, according to Ovum.

On the other hand, at the moment, it appears that a boost to 10 Gbps offers “much greater revenue growth potential,” according to Ovum analyst Kamalini Ganguly. Optimists might well argue this is the case as faster speeds have in the past provided a rationale for higher prices, and a doubling of speed from 500 Mbps to 1 Gbps will be dwarfed by a boost of an order of magnitude (10 times) from 1 Gbps to 10 Gbps.

source: Strategy Analytics

It would be historically correct to note that, over time, the cost per delivered gigabit of data has declined. It also would be true to note that, over time, customers consume more data. So lower units costs are balanced by higher consumption.

That is largely the reason why average revenue per account for mobile data tends to grow, over time. The only issue is how wide the revenue delta will be as speeds continue to rise, and end user consumption continues to rise.

By one line of reasoning, end user willingness to pay cannot exceed growth of disposable income, household income or a certain percentage of total household income, absent other key changes in spending habits.

In other words, if typical spending is two percent to three percent for all communications services, mobile services or data services, most buyers are unlikely to change those patterns very much, over the long term. To change the consumption curve in a significant way, spending on other products has to decrease, or household income has to increase (the rising tide that lifts all boats, even if spending percentages do not change).

source: ResearchGate

Also, much hinges on the degree of competition and adoption rates, one rightly might argue. That already has been the case. If past is prologue, the revenue boost from 10 Gbps might not be as great as some hope.

So far, gigabit services have boosted internet service provider revenue only up to 11 percent, says Ovum. “Reasons for that include low premiums in competitive markets and lack of take-up of gigabit services.” In other words, low adoption rates and competitive pricing have limited the ability to sell the higher-priced services.

Ovum bases its conclusions, apparently in part, on present experience of 10-Gbps services.

“The lowest 10-Gbps price premium we found was 47 percent,” said Ovum. That was the posted retail tariff for Singapore ISP M1's premium over its own 5-Gbps plan.

“The premium increases to 173 percent if compared with the 2-Gbps services. In other markets, the 10-Gbps premium over 1-Gbps ranges from 215 percent to 327 percent,” Ovum says.

Several caveats likely are in order. Historically, though price premiums for faster-speed services, as with mobile internet plans featuring higher usage, have cost more, such price premiums tend not to last.

Among the reasons: over time, the leading offer becomes a standard offer, with standard pricing; customers tend to upgrade, but not to the highest level of service; so over time, the standard offer is deemed “good enough” by most consumers.

That might not be the case for enterprise and business buyers, who logically are the lead buyers for the fastest services.

“The higher price points mean that 10-Gbps services are aimed more at enterprises (which have higher and symmetrical bandwidth requirements) and within the consumer segment at subsegments such as high-end gamers, who can afford the higher price points,” Ovum argues. “Other target groups include SMEs with large content requirements.”

The point is that there are some reasons to predict growing spending by accounts on internet access services, based on growing consumption and faster speeds. Just how much spending can grow will be bounded by growth of household income, shifts in consumption patterns, the degree of competition in each market and advances in technology.

But some of us will argue that it is the limitation of disposable income that will be key. There is only so much a typical household or person will spend on internet access. That is less the case for business accounts, but even there, a limit remains as to how much total communication spending will happen. That also tends to be a function of entity income (revenue and earnings).

Ranking UCaaS Suppliers

Although unified communications as a service (UCaaS) is a niche, it seems to be viewed as an increasingly important niche, as business customer revenues now are increasingly the foundation for tier-one service provider growth. But in a fragmented market, differentiation arguably matters.

As hard as it might be to differentiate clearly in the business unified communications space, suppliers always seek to identify niches and segments within which to operate.

According to Gartner analysts, differentiation often happens based on target buyer employee base. Sometimes it happens based on the other software environments used by the potential buyer (Cisco, Microsoft being key). Sometimes geography plays a big role. Sometimes the lead features are based on specialized features such as conferencing or mobility.

Gartner also ranks firms by completeness of vision and ability to execute. But it arguably is not easy to maintain differentiation in the business communications space; not when “challengers” include firms such as Microsoft, Google, AT&T and NTT Group.

Consider 8x8,  historically focused on small and mid-size accounts in the United States, but which now sells to enterprises with 1,000 to 5,000 employees globally.

source: Gartner

AT&T prefers accounts with at least 40 percent of users in North America. BroadSoft sells mostly through partners, including telcos. BT prefers multinational enterprises with more than 5,000 endpoints.

Fuze sells primarily in the United States and Europe to firms in the 500 to 5,000 employees range, with roughly half of revenue coming from accounts of at least 1,000 employees.

Google also has entered the business communications market, typically requiring partnerships with voice platforms, and arguably remains largely a conferencing product.

Microsoft arguably does best with  Microsoft 365 customers.

Masergy focuses on organizations between 100 and 2,500 employees. Mitel focuses on mid-size accounts of perhaps 250 employees.

NTT Group arguably operates in the widest range of segments, especially when Cisco and Microsoft cloud UC stacks are important to customers. NTT can support customers ranging from 100 employees to more than 50,000 employees.

Orange is stronger internationally, outside the United States, and arguably with customers using Cisco infrastructure more than Microsoft.

RingCentral focuses on mobile-centric small and mid-sized organizations up to 5,000 employees.

Star2Star focuses on organizations with 50 and 2,500 employees seeking lower-cost OTT connectivity.

Verizon is Csco-based for multinationals with more than 1,000 employees, and typically prefers accounts where 40 percent or more of their sites U.S.-based. Verizon’s SMB platform is based on BroadSoft.

Vonage historically has targeted the small and mid-sized organization market, not large enterprise, and for that reason seems not to be covered by Gartner at the moment.

West is primarily U.S. based and focuses on Cisco implementations for organizations between 500 and 5,000.

Will Telcos Finally Reverse Internet Access Market Share Gap?

U.S. telco--especially the former and present rural providers--have not fared well in the internet access market share battle against cable TV for some years. In fact, it has been nearly two decades since telcos had more internet access market share than did cable TV operators.

Some think the trend is nearly irreversible, with telcos collectively unable to maintain present market share in internet access.

To be sure, some might argue that telcos have deliberately traded profit margins for market share . Others might note that, at least since 2012, not even that strategy has worked.

source: UBS

But one always has to be alert for changes. And it already is clear that markets could be changing, in part because telco upgrades are no longer constrained to “fiber to home” upgrades, and some important providers (AT&T. Verizon) might be able to upgrade their networks much faster than has been possible in the past.

At the same time, in part because mobile access itself is claiming share in a fixed internet access market that might already have peaked, demand could shift in a mobile and wireless direction that would reduce the share of internet access served by cabled networks.

Since it is AT&T and Verizon that are the likely biggest beneficiaries of that shift, there clearly is potential for internet access market share to shift in a way we have not seen for several decades.

Perhaps for such reasons, Moffett Nathanson researchers now have reduced their predictions for cable TV market share in internet access, from 55 percent share to about 51 percent.

That would be a huge shift, reversing almost two decades of cable TV dominance in internet access.

CenturyLink Earnings Now Driven by Business Segment

Even before consolidating of Level 3 financials, CenturyLink’s third-quarter earnings report shows why the company, going forward, is likely to be driven by its business customer segment, not the consumer fixed line business.

Also, though its legacy is as rural telco--similar in heritage to Windstream and Frontier Communications--CenturyLink now is different. It has global operations and primarily earns its revenue from business customers, not consumers, though it has a big consumer markets presence.

CenturyLink’s big miss on revenue and earnings was driven by underperformance in its enterprise segment--not the consumer business. Overall, revenues dropped eight percent.

Keep in mind that CenturyLink earns 75 percent of its revenue from business customers. Enterprise revenue was down 11.2 percent, while consumer segment revenues were off 5.8 percent.

There were, to be sure, some one-time items. Enterprise revenue dropped because CenturyLink sold its data center asset sale. Taking out the impact of the asset disposition, enterprise revenue actually grew four percent (strategic services) to 5.5 percent (bandwidth services).

Consumer segment revenues declined primarily due to voice revenues and lower video revenues due to the restructuring of a satellite video contract.

Neither enterprise nor consumer segments declines are helpful, but the enterprise segment is key for CenturyLink, as it represents 75 percent of total revenue.

“CenturyLink's results for the quarter were below our expectations due primarily to lower-than-anticipated growth in enterprise revenues, said Glen Post, CenturyLink CEO.

“We have a great Consumer business that's very important to us, but we are not a primarily consumer-focused company,” said Jeff Storey, CenturyLink COO. “Approximately 25 percent of our revenue comes from consumers. 75 percent of our revenue comes directly from enterprises or through the wholesale customers we support.”

In the third quarter, CenturyLink  came in at approximately $65 million below internal expectations for enterprise revenue,  primarily due to a miss of about $35 million in customer premises equipment revenue.

CenturyLink generated about $20 million less growth in high-bandwidth data services and

$10 million of lower legacy revenues, primarily lower long distance and private line revenues.