What should network operators be focusing on today? I know you think I’m going to say “5G” but I’m not, at least not in any emphatic or traditional sense. The question isn’t what network evolutions are going to be, after all. If you’re going to do wireless in five years, you’re going to do 5G in some form. The real question is what would be transforming in terms of profits, and that’s what I’m going to try to answer. To do that, I’ll focus on the 2020-2023 period.
The high-level question for operators is whether to focus on cost management or revenue growth in order to improve profits. My modeling says that in our 2020-2023 period, the maximum impact we could expect from improvements in operations efficiency would be about 8 cents per current revenue dollar. The maximum that could be expected from improvements in capex associated with the transformation from devices/appliances to hosted features is about 7 cents per current revenue dollar. There are some cross-impacts between these, making the maximum combined savings about 12 cents per current revenue dollar. This isn’t anything to sneeze at overall, but it’s not really transformational in the minds of many operators.
Let’s now look at the revenue side, but in order to talk about revenue potential in a practical way, we have to consider it in light of the industry’s competitive dynamic, and the realities of the current marketplace. We’ll start with the latter, and express those realities in the form of a couple of axioms.
Axiom number one is that for any given service, the average revenue per user will fall over time. Mobile users aren’t going to pay more for a service next year than they did this year, nor will users of other services. Competition and the natural tendency of users to constrain usage to control spending see to that.
Axiom number two is that network operators will win new service competition with over-the-top players only where they have an advantage to leverage. Where have operators been able to compete effectively with OTTs? Nowhere other than in access services, where they have an advantage of having a lower ROI expectation than the OTTs.
What the first axiom means for network operators is that only new customers create new revenue for the current services. Since we’re already almost fully penetrated in terms of human customers, the only hope of customer growth is to sell to non-humans, which of course is why we have such a craze for cellular-connected IoT. The problem is that today’s applications for IoT are almost totally confined to “facilities” where local sensor attachment to a portal is the most cost-effective approach.
Cellular IoT advocates will point to things like autonomous vehicles as the solution, which presumably means giving a vehicle a separate mobile connection. That’s possible, but don’t we have today the ability to link phones to vehicles? We even have auto GPSs that will link to phones to pass traffic and other data. I would argue that the average household, who today are looking for family plans to cover kids’ phone services, are unlikely to embrace having to buy services for their cars unless there’s no alternative, which there is.
In any event, it’s not clear exactly what an autonomous vehicle needs a connection for. We navigate using GPSs. We can get traffic conditions via current GPSs, or supplement it with a GPS connection to our phone. That handles the “strategic dimension” of self-driving. The “tactical dimension” of stopping at lights or avoiding collisions is clearly something that needs on-vehicle sensors.
The net of this is that operators can’t look for “non-human” customers for revenue growth in traditional services, wireless or wireline. That means they have to go for non-traditional services, and the problem there is that they lose their pride-of-place advantage over the OTTs because their access assets aren’t a value…or are they?
The asset the operators do have to leverage is the central offices and mobile sites, which combine to create the service edge. “Edge computing” means something if you have an edge somewhere to compute in. There are perhaps 14,000 sites in the US where operators could install equipment easily, and almost 50,000 where they could install some equipment. The figures for the rest of the world are similar when you factor in population and GDP, but my numbers say that we have a total of 206,000 sites where network operators could install edge computing. Nobody else has that kind of real estate to leverage.
So what services do operators leverage? In the 2020-2023 period, the number one service opportunity is related to streaming video. Video caching, ad caching, and ad insertion are critical services even today, and you can see that personalization of the material demands a form of what I’ve been calling “contextualization”. If a video viewer has been surfing around for cars, you don’t want to show the viewer boat ads. If the viewer is in a boat showroom, however…. Anyway, my model says that video and ad caching and personalization represent a potential for about 35 cents of revenue gain during our four-year period.
There is no way that IoT would match that, nor any way that normal growth in mobile services would match it. In short, the best-by-far chance for network operators to improve profits is to address the video space. Yes, there will be other opportunities that develop after 2023, even for IoT which could generate as much as 45 cents more of revenue from 2024 through 2030. The problem is that they bloom rather late, and operators need profit gains in the near term.
Contextualization is also the on-ramp to augmented reality (AR), which is what I said in a previous blog. That could be a direct driver of 5G, but it depends less on the network than it does the intelligence that relates the user to the user’s environment, which is outside the network and more directly related to personalization. IoT, at least in the form of location-related services, is something that AR could exploit, but you’d need a rich AR opportunity to drive wholesale deployment of cellular-connected sensors.
Remember all of this as you’re navigating the MWC hype on 5G. We’re looking at the future as a technology race, and it’s really a profit race. Nobody is going to spend much on 5G or anything else if it doesn’t generate a respectable ROI. The future is what we’re able to pay for.