Will 5G Really Open New Revenue Opportunities?

Just when you express hope that the network industry can shed the past, somebody demonstrates it won’t be easy.  An interview in Light Reading with Amdocs CTO Anthony Goonetilleke proposes that one of the unsung benefits of 5G is that it will enable operators to charge for services rather than for data.  Is this really a 5G revolution in making, or are we simply reprising the same kind of silly stuff that’s been around for decades?

On the surface, it may seem the notion has merit.  Say you’re a mobile operator.  You decide that your current average revenue per user (ARPU) is too low, so instead of offering unlimited usage and fixed price for all data, you’ll charge separately for video streaming.  5G will let you do that, right?  Answer, only maybe.  Furthermore, even if 5G does let you do it, it doesn’t ensure that anyone will be willing to pay.

The notion of per-service pricing is just one of a variety of models that substitute usage pricing for unlimited usage (“all you can eat”) pricing.  We’ve seen these alternative models suggested everywhere, and there’s still a view among some vendors and operators that consumer “turbo buttons” or business services priced on demand are the answer to operators’ revenue-increase prayers.  The problem is that past history and all my surveys have consistently said that users will never accept a pricing model that doesn’t end up costing them less.  The technology implementation doesn’t matter, only the monthly cost.

Businesses never got into on-demand services because you can’t budget for them.  Consumers are even less interested.  The beauty of the Internet and mobile broadband is that you can find more and more things you want to do with them.  If all those things have an incremental cost, then in the main, you won’t do them.  We wouldn’t have everything based on ad sponsorship if people wanted to pay for stuff.  Slicing and dicing with 5G doesn’t impact the buyers’ side of the value proposition.  Enabling somebody to do something they don’t want to do (and never did) isn’t going to have any benefit.

The big problem here isn’t just the fact that even vendors aren’t willing to let go of the old, it’s the fact that you can’t transform the operator business model by diddling with the same old stuff you’ve provided all along. While operators and vendors practice either self-delusion or mutual delusions, nobody is facing the reality that the need services beyond connectivity to transform.

What’s particularly troubling to me here is that Amdocs is an OSS/BSS player who engages with the CIO team.  I said in a blog last week that the signs pointed to the fact that the CTO organization was a big factor in the inability of operators to think in anything but the legacy-box way.  I even speculated that perhaps the merging of CTO and CIO (as somebody in the TMF suggested) might help.  But if Amdocs, a vendor who sells to the CTO, has the same problem as the CTO and the CTO’s vendors, where are we to look for insights?

An added element in this equation is the Verizon write-down of Oath, the union of AOL and Yahoo that I blogged about earlier.  Many people have suggested to me that the network operators could break out of their past patterns of behavior not by reorganizing or fostering new-think, but simply by creating separate subsidiaries for OTT-like services.  In these subsidiaries, freed of the old telco behavior, the new services could then grow and prosper.  The problem with that is that it’s very difficult to find any example where the subsidiary model has been successful.  Verizon hasn’t made it work with media services and before that with cloud computing.

Are we left, then, with the notion that 1) the CTO organization is mired in past standards practices and incapable of software thinking, 2) the CIO organization knows only past software practices and is mired in connection thinking, 3) separate subsidiaries die on the vine, and so 4) no OTT success is possible?  Does that mean that network operators might be doomed forever to a low-margin business model so much like public utilities that they might need monopolistic protection or new regulation?

I think all four of the first notion’s points are likely true, certainly in the near term.  Whether the last point about low-margin doom and government protection is true is still an open question.  A low-margin connection service business would be possible if we had the proper mixture of four conditions.

The first condition is a high demand density in the provider’s service area.  Demand density is essentially “opportunity per square mile”, a measure of the total addressable market (TAM) of the businesses and consumers available.  Operators with high demand densities have, over the last 15 years, managed to sustain reasonably strong businesses despite the changes in the nature of services.  Japan and Singapore are examples of this.  Low demand densities (like Australia) have had difficulties keeping network operators strong, and in Australia’s case have attempted a kind of semi-public infrastructure model with NBN.

The second condition is an option for very low-capex broadband delivery.  This is obviously a condition related to the first; the better your demand density the less pressure there is on broadband capex.  The relationship is important because in most markets, demand density sits in a middle range, high enough for some reasonable opportunity, but not so high the opportunity falls in your lap.  The most critical development in this space is 5G/FTTN.

Condition number three is exceptionally efficient service lifecycle automation.  Generally, operations costs are a greater threat to network operator profits than capex, and the financial markets even tend to ignore capex in their common EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) method of assessing network operator financials.  Opex is a pure drain, and the total of “network/process opex” for most operators is about half-again as much as capex anyway.  Cut that and you have a better shot at profits.

The final condition is a means of monetizing broadband traffic.  This doesn’t mean something as simple as charging for video, but rather something like paid prioritization, one of the arch-villain concepts of the Net Neutrality debates.  What operators would like to do is not to charge users, but charge OTTs for video delivery, but do so by making best-efforts a competitive disadvantage.  “XYZ Corp is using priority delivery so their customers will get better video streaming.  What about you?”

Paid prioritization, if paid by the consumer, is a non-starter because consumers want to pay less, not more.  Paid prioritization, if paid by the OTT, doesn’t require 5G.  Thus, nothing in this condition for profit has anything to do with 5G deployment.

Where are we, then?  There’s not much an operator can do to improve its demand density.  Regulatory policy ebbs and flows in most markets, so you can’t be sure that what regulators might appear to be giving you today won’t disappear when political lines shift.  That means that lifecycle automation and broadband delivery cost are the only things that can really enable operators to stay out of regulated-monopoly hell if they try to build a future on connection costs alone.

Lifecycle automation has been the goal of operators for over a decade, and despite the fact that all the critical conceptual/architectural pieces were in place (put there by the TMF) back then, nothing much rational has been done to advance it.  Even if somehow the operators and their vendors got smart on January 1, 2019, there’s zero chance that we’d make any real progress in the coming year, and almost no chance of progress in 2020.  Look at the past performance of standards groups; we just heard of a slip in some 5G standards, and the ETSI NFV ISG group has been working without a useful result for half a decade.

That leaves us with the 5G/FTTN hybrid.  Where demand density is high, you can address broadband delivery through fiber to the home (FTTH).  As demand density drops, FTTH becomes too costly for a user’s ARPU to return a profit on it.  In the US (where obviously I have better numbers) my current model says that Verizon could deliver FTTH to about 40% of its customers at best, and AT&T to about 22%.  A combination of 5G and fiber to the node (FTTN) could deliver 50Mbps to 100Mbps to about 90% of Verizon’s customers and about 54% of AT&Ts.

Asia except China has demand density high enough to make FTTH practical.  The required demand density for 5G/FTTN to work is roughly a 3.0 on a scale where US average demand density is 1.0.  Most of Europe fits that model, and the populous areas of the rest of the world do as well.  Thus, if we presume (as I think most do) that broadband delivery of at least 50Mbps will be required in the future, then the 5G/FTTN hybrid is the most important single development in networking as far as empowering operators to stay profitable and out of the OTT service market.

The CIO has little to do with 5G/FTTN hybrids.  In reality, 5G has little to do with them; it’s really a millimeter-wave application that doesn’t involve even the minimal 5G Non-Stand Alone (NSA) spec, much less the 5G core and the network slicing feature that Amdocs is likely referencing.  I see no movement toward charging more for video, and no mission for OSS/BSS vendors in making that happen either.  This is going to come down to capex and opex, and the industry is going to have to get its act together to control and optimize both.